December 2006

December 31, 2006

The quintessential Halloween movie is "Nightmare Before Christmas." The quintessential Thanksgiving movie is "Addams Family Values." The quintessential New Years movie? We're experimenting. I was arguing for "Monty Python and the Holy Grail." The kids have settled on "Red Dawn."

UPDATE: Neither can hold a candle as a New Years Eve movie to "Trading Places."

Michael Fletcher of the Washington Post begins an article that reads as if it were dictated by the White House press office with:

Bush Has Quietly Tripled Aid to Africa - washingtonpost.com: President Bush's legacy is sure to be defined by his wielding of U.S. military power in Afghanistan and Iraq, but there is another, much softer and less-noticed effort by his administration in foreign affairs: a dramatic increase in U.S. aid to Africa.

The president has tripled direct humanitarian and development aid to the world's most impoverished continent since taking office and recently vowed to double that increased amount by 2010 -- to nearly $9 billion.... [F]our African nations -- Sudan, Ethiopia, Egypt and Uganda -- rank among the world's top 10 recipients in aid from the United States.... Bush has met with nearly three dozen African heads of state.... He visited Africa.... [A]ides say he hopes to make a return visit...

What Fletcher never finds space to say is that Bush has raised U.S. aid to Africa per African from $2 per year to $6 per year, and has raised aid to Africa as a share of the Federal budget from 0.08% to 0.17% of federal government spending.

With Washington Post reporters, you never know what they are thinking. Is Fletcher omitting the relative scale measures because he knows that readers will conclude that he is really stupid if he writes "Bush has dramatically increased aid to Africa from $2 to $6 per African per year" and the purpose of his article is to please his sources inside the White House? Or is Fletcher omitting the relative scale measures because he genuinely has never bothered to learn anything either about the relative size of aid to Africa in what the federal government does or about the relative importance of U.S. aid in the context of Africa's development and economy and so is easily manipulated by his sources inside the White House? Mendacious? Or lazy and stupid?

Abu Aardvark: the timing, stupid: The decision to execute Saddam [Hussein] on the [Sunni date of the observance of the] Eid[-ul-Adha holiday] has swamped pretty much every other aspect of the Arab discussion of Saddam's fate. Anger over the timing has probably overwhelmed any other sentiment (with "it doesn't change anything, Iraq is still a mess" coming a close second).... Officials from Saudi Arabia, Egypt and Jordan have all expressed surprise and anger over the Eid timing. This reaction was entirely predictable, which makes it hard to explain as anything other than intentional. Maliki did it this way for a reason - maybe not a good reason, or a smart one, but a reason nonetheless...

Juan Cole writes:

Salon.com | Saddam: The death of a dictator: The tribunal also had a unique sense of timing when choosing the day for Saddam's hanging. It was a slap in the face to Sunni Arabs. This weekend marks Eid al-Adha, the Holy Day of Sacrifice, on which Muslims commemorate the willingness of Abraham to sacrifice his son for God. Shiites celebrate it Sunday. Sunnis celebrate it Saturday %u2013- and Iraqi law forbids executing the condemned on a major holiday. Hanging Saddam on Saturday was perceived by Sunni Arabs as the act of a Shiite government that had accepted the Shiite ritual calendar...

Econbrowser: WIN buttons and Arthur Burns: [Arthur] Burns was indeed a very sharp economist. But let's carry the story back a bit earlier. Richard Nixon had been running for president as the incumbent vice president in the 1960 election. Here is how Nixon, in his book Six Crises published in 1962, described the advice he received from Burns prior to the 1960 election:

Early in March, Dr. Arthur E. Burns... called on me in my [vice president's] office in the Capitol.... [and] expressed great concern about the way the economy was then acting.... Burns' conclusion was that unless some decisive governmental action were taken, and taken soon, we were heading for another economic dip which would hit its low point in October, just before the elections. He urged strongly that everything possible be done to avert this development. He urgently recommended that two steps be taken immediately: by loosening up on credit and, where justifiable, by increasing spending for national security. [pages 309-310]

In other words, if you want to win the election, better hit the gas pedal for monetary and fiscal policy. Nixon continued:

In supporting Burns' point of view, I must admit that I was more sensitive politically than some of the others around the cabinet table. I knew from bitter experience how, in both 1954 and 1958, slumps which hit bottom early in October contributed to substantial Republican losses in the House and Senate. The power of the "pocketbook" issue was shown more clearly perhaps in 1958 than in any off-year election in history....

Unfortunately, Arthur Burns turned out to be a good prophet. The bottom of the 1960 dip did come in October and the economy started to move up again in November-- after it was too late to affect the election returns. In October, usually a month of rising employment, the jobless rolls increased by 452,000. All the speeches, television broadcasts, and precinct work in the world could not counteract that one hard fact. [pages 310-311].

When Nixon himself became president in 1968 and had the opportunity to appoint a new Chair for the Federal Reserve in 1970, the man he turned to was the same Arthur Burns who had advised him to ease up on monetary policy prior to the 1960 election. Milton Friedman offered these impressions in a 2000 interview that is included in the book Inside the Economist's Mind:

From the moment Burns got into the Fed, I think politics played a great role in what happened. So far as Nixon was concerned, there is no doubt, as I know from personal experience. I had a session with Nixon sometime in 1970-- I think it was 1970, might have been 1971-- in which he wanted me to urge Arthur to increase the money supply more rapidly [laughter] and I said to the President, "Do you really want to do that? The only effect of that will be to leave you with a larger inflation if you do get reelected." And he said, "Well, we'll worry about that after we get reelected." [page 116].

Now, I do agree with Dave that it is easy to make mistakes running the Fed in real-time that many of us would have avoided with 20-20 hindsight. The current academic consensus, which has emerged from some very well done research such as Northwestern Professor Giorgio Primiceri's forthcoming study in the Quarterly Journal of Economics or respected Fed researcher Athanasios Orphanides' 2002 paper in American Economic Review, has concluded pretty clearly that at least part of the cause of the 1970s inflation was bad data and a misunderstanding of how the economy works. But I am forced to conclude also that, in the face of such uncertainties, Nixon and Burns appear to have been wanting to err on the side of doing whatever would most help them win the next election.

And, despite the clever arguments that Dave brings up in the WIN button's favor, I think one great disservice of that campaign was to cultivate the misperception that inflation is somehow the responsibility of ordinary U.S. citizens. In my view, maintaining the purchasing power of a dollar is instead exclusively the responsibility of the people who control how many dollars get printed...

The excellent Jon Hilsenrath and Rafael Gerena-Morales have an article http://online.wsj.com/article/SB116727318376761110-email.html about the Clinton-era "Moving to Opportunity" pilot program. And, coincidentally, a correspondent asks me this evening if it is indeed the case that high relative poverty among African-Americans today is principally due to residential segregation, and whether residential segregation is in turn principally due to African-Americans' preference to live near other African-Americans.

There are certainly other powerful causes of residential segregation. You can see some of them at work in this gem from the 1994 Wall Street Journal about "Moving to Opportunity" that I have filed away:

"Clinton's Wrecking Ball for the Suburbs": By James Bovard: 4 August 1994: Pamela Price was delighted when she found she could use her new government housing voucher to move into a luxurious apartment complex with a heated swimming pool, four spas, six tennis courts and two air-conditioned racquetball courts.... Ms. Price is the beneficiary of a federal housing policy called "income integration" -- which consists largely of moving welfare recipients into affluent neighborhoods, theoretically to improve their prospects of leading safe and productive lives. But these Section 8 vouchers from the Department of Housing and Urban Development end up sowing chaos in suburban neighborhoods, rewarding dependence on the state and alienating middle class Americans who end up paying for recipients to live in apartments that they themselves could not afford. Amazingly, Congress is on the verge of passing a $60 billion housing act that will greatly expand this program....

At Manhattan Plaza in New York City, Section 8 pays for apartments with wood parquet floors and on-premise swimming, racquet and tennis facilities.... Section 8 certificates were used to entitle welfare families to move into an apartment complex in Silver Spring, Md., that includes a heated pool with water jets, microwave ovens and "deluxe modern kitchens with convenient breakfast bars."... HUD raised Section 8 subsidy levels in Plano, Texas, to $684 for a two-bedroom and $900 for a three-bedroom apartment.... [T]he median rent in Plano, Texas, is only $586 a month....

The unfairness of this hasn't gone unnoticed... outraged private citizens.... Nevertheless, Housing Secretary Henry Cisneros is expanding the Section 8 program.... The flood of former public housing residents has turned parts of some nearby towns into a "Section 8 corridor." Officials in Pacesetter, Ill., claimed that "a sudden influx into the neighborhood of subsidized families about six years ago turned a borderline neighborhood into a slum."...

[P]ublic controversies over misbehaving Section 8 recipients have exploded.... [C]rime and declining property values caused by Section 8 clients have become a major political issue.... the irresponsibility of a privileged class of renters... Trouble-making public-housing residents will not be transformed into angels simply by moving them into different neighborhoods...

The "Moving to Opportunity" pilot program was never expanded. Let me give the mike to Jon Hilsenrath and Rafael Gerena-Morales:

How Much Does A Neighborhood Affect the Poor?: JON E. HILSENRATH and RAFAEL GERENA-MORALES: December 28, 2006: The Moving to Opportunity program, started in 1994, was a mix of liberal and conservative policy: hatched by Republican Jack Kemp and implemented by the Clinton administration. But later that year, in Baltimore -- one of the five cities participating -- suburbanites rebelled against the idea that poor families from troubled environments would be flocking to their neighborhoods. Plans to move additional families were canceled...

And the results from follow-ups are that the effects of "Moving to Opportunity" were mixed--good for girls, bad for boys:

How Much Does A Neighborhood Affect the Poor?: JON E. HILSENRATH and RAFAEL GERENA-MORALES: December 28, 2006: Can a family escape poverty by getting out of the neighborhood where it takes root?... About two million families currently use "Section 8" vouchers that allow them to move with subsidized rent.... Beginning in 1994, the federal government offered a lottery for housing vouchers to families in five major cities. Families were randomly assigned to different groups. One group received vouchers to be used specifically to subsidize rents in neighborhoods where poverty was low. About 860 families eventually moved. Another group, of 1,440 families, wasn't offered vouchers and, initially at least, stayed in high-poverty neighborhoods. Researchers have since tracked and compared the fortunes of the two groups.

The program, called Moving to Opportunity, was administered by HUD.... Earnings of families who relocated to low-poverty areas averaged just $9,376 in 2001, a half-decade after they moved. That's just 3% higher than the $9,108 earned by those in the control group, a statistically insignificant difference.... In a 2002 survey of 3,521 adults in the program -- most of them women -- 18.5% of people who moved to low-poverty neighborhoods suffered bouts of major depression, significantly lower than the 26.3% who felt depressed in the control group....

Among nearly 800 teenage girls, 83% of those who relocated to low-poverty neighborhoods had either graduated from high school or were still in school five years after the move, compared with 71% in the control group. Alcohol use was lower. Arrest rates were lower. And mental-health measures improved. Away from the violence of the ghetto, girls seemed to flourish.

Teenage boys didn't. School participation deteriorated and property-crime rates, mental distress, and smoking all increased among those who moved with the vouchers, compared with teenage boys in families who didn't move. For property crime, there were 58 arrests for every 100 boys who moved to low-poverty neighborhoods, compared with 22 arrests for every 100 boys in the control group.... [R]esearchers expected they would respond well to safer, more-affluent environments. Instead, many seemed to feel isolated in the new places, or harassed by police, and they acted out. "It seems like the boys were less able to make social connections to their new areas," says Jeffrey Kling, a Brookings Institution economist who designed many of the Moving to Opportunity studies and interviewed participants...

December 30, 2006

Why oh why can't we have a better press corps? The innumeracy at the New York Times... The stupidity... It burns! IT BURNS!!

And Now, a Word From Chile ... - New York Times: [American] Social Security does need some changes to protect it over the long term.... [A] combination of modest benefit cuts and modest tax increases, which could be phased in gradually over decades and could guarantee a government benefit that replaces about 30 percent of preretirement income on average, compared with a replacement rate of about 35 percent today.... As long as tax increases are off the table, severe benefit cuts become unavoidable. If the gap in Social Security's finances were closed through benefit cuts only, the average worker's payout would equal only about 10 percent of preretirement earnings...

So the New York Times says that current Social Security taxes--roughly 10.5% of taxable payroll--would only allow for Social Security benefits to equal 10% of average preretirement earnings.

And the New York Times says that with "modest" tax increases Social Security benefits could equal 30% of average preretirement earnings.

There's this thing called arithmetic.

It says that 1+1+1=3.

If you want to get three times the benefit replacement rate, you need to have three times the taxes. Money that flows out equals money that flows in.

God knows where the New York Times got that 10% number, or what they think it is, or what it really is, or why nobody on the New York Times editorial page staff can add, or even perform a simple consistency check, or... or... or... IT BURNS!!!

I am not dissatisfied with where Nordhaus gets: I believe that he is right in assessing that Stern's conclusions depend on assumptions about what we today owe the future that are not obvious, that are at least debatable, and that I do not think I share.

I am dissatisfied with how Nordhaus gets there.

Specifically, the hackles on my back rise when Nordhaus writes:

Suppose that scientists discover that that a wrinkle in the climatic system will cause damages equal to 0.01 percent of output starting in 2200 and continuing at that rate thereafter. How large a one-time investment would be justified today to remove the wrinkle starting after two centuries? The answer is that a payment of 15 percent of world consumption today (approximately $7 trillion) would pass the Review’s cost-benefit test. This seems completely absurd. The bizarre result arises because the value of the future consumption stream is so high with near-zero discounting that we would trade off a large fraction of today’s income to increase a far-future income stream by a very tiny fraction. This bizarre implication reminds us of Koopmans’s warning quoted above to proceed cautiously.... The large damages from global warming reflect large and speculative damages in the far-distant future; the impacts now, as in today, are small; and, as I will suggest below, the 20 percent cut in consumption from global-warming might be reduced by an order of magnitude if alternative assumptions about discounting are used...

The only thing I agree with is the final lines: our conclusions about the steps we should take immediately to deal with global climate change would be reduced by an order of magnitude if alternative (and perhaps, I think, better) assumptions about discounting are used. But the rest:

My first problem is with the framing, which Nordhaus uses to generate phrases like: "bizarre result," "completely absurd," and "bizarre implication." A more neutral way of framing the issue would be to say that the Stern Review estimates that each $1 we invest today in reducing the impact of global warming will improve the state of things in 2200 by $36 (adjusted for inflation) then. Is that a good investment for us to make on behalf of our great-great-grandchildren? Perhaps, perhaps not. 2200 is far away. But a 36-to-1 payoff is a big one. On the other hand, people in 2200 will probably be richer and have better technologies than we do; that is a reason to think that efficiency should not be considered separately from issues of distribution, for we don't usually ask the poor (i.e., us now) to pay to improve the condition of the rich (i.e., them in the future).

The question of whether we today should, or are morally obligated to, make the 36-to-1 two-century investments that the Stern Review is debatable. It is worth doing if we have a hurdle rate for such investments of less than 1.8% per year or so. I think our hurdle rate should probably be bigger than that, but I am not sure. I am, however, sure that Stern's position that we should be making such high-payoff long-term investments is neither "completely absurd," "a bizarre result," nor "a bizarre implication."

My second problem is with Nordhaus's rhetorical attempt to shrink the magnitude of the potential problem by talking about the "large and speculative damages in the far-distant future." The implicit economics underlying this rhetoric is that because investing in controlling global warming is a risky and uncertain proposition the appropriate hurdle rate to apply is greater than the hurdle rate on safe investments like long-term inflation-indexed government bonds. But this economics is simply wrong. As Tyler Cowen puts it, uncertainty is not the friend of doing nothing. Investments in controlling global warming are not risk-increasing but risk-reducing ones: they are more like buying insurance than like speculating on unproven technologies. The appropriate hurdle rate is thus lower, not higher, than that for sure things.

And this leads to my third problem with Nordhaus: his claim that:

The Review’s unambiguous conclusions about the need for extreme immediate action will not survive the substitution of discounting assumptions that are consistent with today’s market place...

I don't see that at all. The 20-year inflation-indexed U.S. government bond interest rate is currently 2.1% per year. That is today's marketplace. The appropriate discount rate to be used for long-term risk-reducing "insurance" investments is less than the risk-free rate, and seems plausibly less than 1.8%. I don't buy the assumption that our judgments should be ruled by the prevailing configuration of financial market prices--I am not confident that the market is without failure along this dimension. But Nordhaus apparently does. And as best as I can see the discounting assumptions in today's marketplace are entirely consistent with the conclusions of the Stern Review.

And my not-completely-informed views about the economics of controlling global warming are:

What Do We Owe Our Great Grandchildren?

What do we owe our great-great-great grandchildren? What actions are we obligated to do now in order to diminish the risks to our descendants and our planet from the increasing likelihood of significant global warming and its associated climate change?

Everybody--well, almost everybody: ExxonMobil, U.S. Vice President Richard Cheney, and their paid-for servants and deluded acolytes are exceptions or pretend to be exceptions--understands that when human burn hydrocarbons carbon dioxide goes up into the atmosphere, where it acts like a giant blanket, absorbing infrared radiation coming up from below and warming the earth.

Everybody understands that we really do not know how much global warming a given amount of extra carbon dioxide produces. We have models, we have forecasts, we have projections, but global warming might be a much smaller and might be a much larger problem than the central-case projections of climate models suggest. Everybody--well, almost everybody: ExxonMobil, U.S. Vice President Richard Cheney, and their paid-for servants and deluded acolytes are exceptions or pretend to be exceptions--understands that here uncertainty is not our friend, and certainly not an excuse for inaction. Uncertainty about its effects should lead us to do more to guard against global climate change than if we knew global warming would proceed exactly as the central-case projections forecast.

Everybody--well, almost everybody: ExxonMobil, U.S. Vice President Richard Cheney, et cetera, et cetera--understands that the world's governments, non-profit institutions, and energy companies ought to be spending a much bigger fortune than they currently are on research: research into technologies that generate power without adding carbon dioxide to the atmosphere, research into technologies that such carbon out of the atmosphere into forests or oceans, research into technologies that cool the earth by reflecting more of the sunlight that lands on us.

Everybody--well, almost everybody: U.S. Vice President Richard Cheney, et cetera, et cetera--understands that the burden of dealing with global climate change over the next two generations should be carried by the rich countries of the world. They got to take an easy carbon emissions-intensive path to industrialization and riches. It looks like China, India, and company will not be able to take such an easy path, and it would be unfair to penalize them for the loss of the easy hydro-carbon burning road.

Everybody--well, almost everybody, et cetera, et cetera--understands that now is the time to build the international institutions that will manage our reactions to global climate change over the next several centuries. Now is not the time to disrupt these institutions, or to prevent their creation.

What there is real dispute about is what else we should be doing right now and in the next decade. We economists like to think of things in terms of prices. And when we economists see something going wrong in the sense of having destructive side-effects, we like to tax it. Taxing it makes the individuals who are undertaking actions feel in their wallets the destruction they are causing elsewhere. Maybe the action is still worth doing, and maybe not. Imposing a tax--imposing the right tax--on those who are, say, driving low-mileage SUVs is a way of harnessing the collective intelligence of humanity to deciding in which case the bad side-effects are a reason to stop. But it has to be the right tax.

An SUV going ten miles in the city and burning a gallon of gasoline pumps about 3 kilograms--6.5 pounds--of carbon in the form of carbon dioxide into the atmosphere. Should the extra tax on this--and on all carbon emissions--appropriate for global warming be on the order of five cents a gallon, fifty cents a gallon, or a dollar fifty a gallon? Our views will change as we learn more, but at the moment whether the tax should be five or fifty cents a gallon hinges on a question of moral philosophy: how much do we believe that we owe our distant descendents?

Australian economist John Quiggin has a very illuminating discussion on his website http://johnquiggin.com/wp-content/uploads/2006/12/sternreviewed06121.pdf. The Stern Review on Global Climate Change (on the internet at http://www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/sternreview_index.cfm) which comes down more on the side of fifty cents a gallon, immediately, does so because they project that spending today to reduce carbon emissions is a very good investment for the future. If the world grows in per capita income at about 2% per year, a marginal expenditure of roughly $70 today in cutting carbon emissions would be worth it if it were to enrich the world of 2100 by about an extra $500 of year-2006 purchasing power, once all the damages to the world economy and environment from global warming, costs of adjustment, and so on are taken into account. This looks like a very good deal to Nick Stern and his team.

On the other hand, critics point out that the world today is poor: average GDP per capita at purchasing power parity today is roughly $7000. We expect improvements in and the spread of technology to make the world of 2100, at a 2% per year growth rate much richer than the world of today: $50,000 per capita of year-2006 purchasing power. We today can use the marginal $70 per capita, critics say, much more than the richer people of 2100 will need the $500 they would gain from not having to suffer from the effects of global climate change.

What critics don't often say is that the same logic applies to the world today. The U.S., Japan, and Western Europe today have average incomes of roughly $40,000 per capita. The poorer half of the world's population today have incomes of less than $6,000 per capita. I believe that the same logic which says that we today need our $70 more than the people of 2100 need an extra $500 also tells us that we ought to tax the world's rich in the OECD more and more to fund world development as long as each extra $500 in first-world taxes generates even as little as $70 in extra poor-periphery incomes. If we in the world's rich now are stingy toward the (likely to be much richer) future and want to leave them our environmental mess to deal with, we should be lavish toward our poor brothers and sisters today. If we today are stingy toward our poor brothers and sisters now, we should be lavish toward our descendents.

If you protest that distributional considerations militate against our spending a lot today to reduce global warming risks to the future, you had better be enthusiastic about massive programs to reduce current U.S. and global inequality. At least, that is what you had better be if your positions are based on some moral principle--rather than on the principle that what we have, we hold, and nobody is going to pry it from our hands.

December 29, 2006

The Washington Monthly: REDEFINING FAILURE.... Frances Fragos Townsend, assistant to the President for Homeland Security and Counterterrorism, was on CNN yesterday discussing the war in Iraq, Saddam's pending execution, and the Middle East, but CNN White House correspondent Ed Henry had the temerity to ask about the terrorist behind 9/11.

Officials from this White House are known for some bizarre comments, but Townsend's response has to go in the Hall of Fame. (via)

HENRY: You know, going back to September 2001, the president said, dead or alive, we're going to get him. Still don't have him. I know you are saying there's successes on the war on terror, and there have been. That's a failure.

TOWNSEND: Well, I'm not sure -- it's a success that hasn't occurred yet. I don't know that I view that as a failure.

A "success that hasn't occurred yet"? By that logic, practically nothing could ever be characterized as failure. Indeed, I'm not sure why the Bush gang hasn't thought of this sooner.

stevenberlinjohnson.com: : Amazing story about how the Bush Administration won't remove a creationist account of the Grand Canyon from the Park Service bookstore there. (It turns out the Grand Canyon may have been created by Noah's Flood. Who knew?) But I just love this line:

As one park geologist said, "this is equivalent of Yellowstone National Park selling a book entitled Geysers of Old Faithful: Nostrils of Satan," Ruch added, pointing to the fact that previous NPS leadership ignored strong protests from both its own scientists and leading geological societies against the agency approval of the creationist book.

Matthew Yglesias / proudly eponymous since 2002: Your Liberal Media: Interesting Washington Post op-ed page today. Bob Dole says Gerald Ford was great. David Broder agrees as does George Will. Robert Novak says he wasn't right-wing enough. It's a good thing they give this stuff away for free on the internet, because if I'd paid money for a newspaper and then wound up with a subscription to Pravda I'd be pretty upset.

And then:

Posted by: Steve on December 28, 2006 01:21 PM: Heh, now that Ford's interview with Woodward is public, the protocol of saying nice things about the recently departed has been declared null and void. Lots of class being shown on the Right today.

And Matthew notes:

[T]he Post isn't abiding by a "speak no ill" rule -- Novak speaks ill. It's just that Novak is criticizing Ford from the right.

And Steve Benen:

The Washington Monthly: Guest: Steve Benen: LET THE SMEARING BEGIN.... I wondered this morning whether Gerald Ford's embargoed criticism of the Bush White House and the war in Iraq might affect the right's praise of the former president this week. As it turns out, the blowback didn't take long. Consider Bill Bennett's fairly aggressive attack on Ford this morning. (via John Cole)

Since "decency" seems to be the watchword of the day and the consensus modifier for Jerry Ford (a view with which I generally concur), may I nevertheless be permitted to ask this: just how decent, how courageous, is what Jerry Ford did with Bob Woodward? He slams Bush & Cheney to Woodward in 2004, but asks Woodward not to print the interview until he's dead. If he felt so strongly about his words having a derogatory affect, how about telling Woodward not to run the interview until after Bush & Cheney are out of office?

The effect of what Ford did is to protect himself, ensuring he can't be asked by others about his critiques, ensuring that there can be no dialogue. The way Ford does it with Woodward, he doesn't have to defend himself... he simply drops it into Bob Woodward's tape recorder and let's the bomb go off when fully out of range, himself. This is not courage, this is not decent....

I guess it's fair to say the hagiography period is over for some of Ford's former allies on the right?

Matthew Yglesias / proudly eponymous since 2002: Saddam Hussein is a monster who the world will be well rid of.... [But] Saddam was charged with the wrong crime. When you think "Saddam Hussein and crimes against humanity" your thoughts naturally turn to Halabja/Anfal. Prosecuting that case, however, raised awkward questions about Don Rumsfeld's meet-and-greet.... The purpose of said visit, as people might recall were the American press not to have its head in the sand, was largely to reassure Saddam that the Reagan administration's public condemnation of Iraqi chemical weapons use against the Iranian military and Kurdish insurgents was not something Baghdad should take especially seriously. [George Shultz's] State Department would condemn, but [Ronald Reagan's] special envoy Rumsfeld was around to cut deals.... At any rate... prosecutions for further crimes, including matters related to Anfal, are now deemed unnecessary, and Rumsfeld and the rest of the Reagan national security team can escape scrutiny....

Saddam is being executed for the specific charge of killing 148 men and boys from the town of Dujail in retaliation for a July 8, 1982 assassination attempt.... Saddam's legal team argued that... this fell under the purview of sound counterinsurgency strategy and said argument was rejected.

Fair enough, but compare this to, say, Fallujah. Thirteen civilians were killed when American soldiers opened fire on protesters. This led, in turn, to the murder and mutilation of four contractors employed by the US military. This led to a retaliatory military strike on the town by US and Iraqi government forces that local doctors claimed killed over 600 people. The Iraqi health ministry disputes that, arguing that "only" 271 civilians died in the attack, during which "more than half" of the city's homes were destroyed.

The exact same as what happened at Dujail? No. A completely different sort of thing? Also no.... [And what] about the people tortured to death after the Bush administration's decision to ignore international and domestic law regarding detentions and interrogations? Which is all just to say that the Bush administration has every reason to seek to undermine international human rights law...

December 28, 2006

Matthew Yglesias / proudly eponymous since 2002: Escalating Silence: I don't know when Scott Stanzel started working as a White House spokesman, but his rejoinder to Joe Biden's anti-escalation views doesn't make much sense: "I would hope that Senator Biden would wait to hear what the president has to say before announcing what he's opposed to." So while the Decider dithers none of us are allowed to offer our opinions about what he should do? I suppose it would be convenient for the White House message team if things worked that way. I think Gary Schmitt from PNAC is insightful on the psychodynamics here:

"No president wants to be remembered as the guy who lost a war," he said. "Who knows whether this is a day late and a dollar short, but it is a striking example of presidential will trying to bend the system to what he wants."

Roughly speaking, the fixed point of the president's thinking is an unwillingness to admit that the venture has failed. For a long time the best way to do that was to simply deny that there was a problem.

Political strategy for the midterms, however, dictated that the president had to acknowledge the public's concerns about the war and concede that things weren't going well. At that point, simply staying the course doesn't work anymore. But de-escalating would be an admission of failure, so the only option is to choose escalation.

Thus, the idea of an escalation starts getting pushed and we start reading things in the paper like "Top military officials have said that they are open to sending more U.S. troops to Iraq if there is a specific strategic mission for them."

Consider the process here. It's not that the president has some policy initiative in mind whose operational requirements dictate a surge in force levels. Rather, locked in the prison of his own denial he came to the conclusion that he should back an escalation, prompting the current search for a mission.

Noka makes obscenely expensive chocolate ($2080/lb in small doses). This superb exposé from a very, very serious chocolate geek reveals that they buy widely-available chocolate and remold it at up to a 6,956% markup. Excellent reading and a good reminder that price is often not proportional to quality.

Link to "What's Noka Worth?" on dallasfood.org.

I can't speak to the veracity of the claims in this exhaustive (10! part!) investigative series, but I couldn't stop reading it. I don't even care much about the subject in general -- I hardly eat sweets at all, myself -- but the scientific references and geeky specificity made this a riveting read. It's more about economics and the psychology of luxury goods than chocolate alone...

I noticed an interesting thing while looking at the sensitivities of the receptors in the eye. The blue (beta) and green (gamma) receptors tail off to insignificant sensitivity much more sharply than the red (rho). The red sensors are actually more sensitive to very short wavelengths than the green, and begin to rival the blue ones.

As you approach the limits of human vision near the ultraviolet, the ratio of sensitivity of the red sensors to blue sensors is increasing, not decreasing.

So, photons of purple light (and yes, there is indeed a wavelength that is purple) stimulate the receptors in exactly the same way that combinations of red and blue light would. Had it not been for the quirk of the long tail in the red receptor sensitivity, we may never have had the concept of purple. The color wheel might have been a color bar. Blue would have just covered a larger wavelength range like red does. This might need explaining. While most texts say human sight goes to about 700 nm, it really goes much further (I have no problem seeing 790 nm). It's just that everything looks the same shade of red because the green and blue receptors are of negligible sensitivity. If there were not a long tail of sensitivity in the red receptors at the blue end of the spectrum, everything we see shorter than 420 nm would look exactly the same shade of blue.

Hedge Funds Better at Managing Data Than Managing Money By ALAN B. KRUEGER - New York Times: December 9, 2004: HEDGE funds have grown at supersonic speed. In 1990, about $50 billion was invested in hedge funds; today, the amount is estimated at $1 trillion. Does superior performance explain the rapid growth? No, says Burton G. Malkiel, a professor of economics at Princeton University, and Atanu Saha, a managing principal at the Analysis Group, a consulting firm. The researchers recently completed a study that challenges the often-made claim that hedge funds, in general, produce lofty returns.

Hedge funds are a diverse set of investment funds that typically cater to wealthy clients and institutions. The funds pursue various strategies, like holding both long and short positions, and often employ substantial leverage. Their fees are usually much higher than those charged by mutual funds or other financial assets. Data on the performance of hedge funds comes from indexes like the CSFB/Tremont Index or the Van Hedge Fund Index. Those indexes are generated by companies that advise investors and operate funds. "Hedge funds in aggregate," Van Hedge Fund Advisors boasts on its Web site, "in most multiyear periods, have provided both superior returns and lower statistical risk than the S.& P. 500 or mutual funds."

The catch, according to Professor Malkiel, is that the information on performance is voluntarily provided to the organizations who track the funds. Because a good record helps attract investors, funds have a tendency to start reporting results only after they have achieved some success. Funds that are losers right out of the gate may never be represented in the database. Furthermore, when funds start reporting, they have the option of "backfilling" their data, or providing information on returns for previous months. If a fund was successful in preceding months, it has an incentive to backfill its data to increase its attractiveness to investors. This process creates a "backfill bias," because better results are overrepresented in the database. It is as if the Boston Red Sox waited until 2004 to report their World Series success, while the Yankees started in 1923; both franchises would look like smashing successes.

By analyzing statistics from TASS Research, which is owned by Tremont Capital and has perhaps the most comprehensive data on returns, Mr. Malkiel and Mr. Saha have shown that the backfill bias is substantial. The returns that were backfilled for a given year were 5.8 percentage points higher than the returns of other funds whose results were contemporaneously reported for that year. "I think there are a lot of people in the financial community who have a vested interest in showing only those pieces of data that help them sell products," said Professor Malkiel, who is also a director for the Vanguard Group.

Another problem he noted, called survivor bias, is a tendency for funds to stop reporting their monthly returns when they suffer losses and are on the verge of closing. Long-Term Capital Management, for example, did not report its losses to any of the database services from October 1997 to October 1998, a period when it lost 92 percent of its capital. (Long-Term Capital never reported to the TASS database.) Looking only at the past returns of hedge funds that are in existence today - that is, the surviving funds - it does appear as if hedge funds do produce generous returns. But this is tantamount to judging the success of a war by ignoring all the casualties. Mr. Malkiel and Mr. Saha have found that the funds that cease reporting their data, so-called dead funds, tend to have weak returns in the months before they cease reporting. The average annual return for dead funds was 7.4 percentage points less than that of surviving funds for the same years.

And hedge funds have a tendency to die - more than 10 percent stop reporting to the database each year. Although it is possible that some of these funds withdrew because they were so successful that they no longer desired further investors, the researchers found that smaller and underperforming funds were the most likely to cease reporting - not a profile of successful funds that were turning away business. Using data from 1996 to 2003, Mr. Malkiel and Mr. Saha found that correcting for backfill and survivor biases reduced the average annual return on hedge funds, after deducting fees, from 13.5 percent to, at most, 9.7 percent, which is almost three percentage points less than the return on the Standard & Poor's 500-stock index for that time period.

The lower return could be justified if hedge funds helped to diversify portfolios by providing an investment that did not move in lock step with other investments, and the researchers did find that hedge funds do not move closely with the stock market over time. Yet they also found that choosing a particular hedge fund entailed considerable risk because the funds exhibited enormous variability in performance in any given year. The best funds perform extraordinarily well, but the worst ones perform extremely poorly, with the spread between the best and worst greatly exceeding the spread between the best and worst equity or bond funds in a typical year.

"Clearly, there is a risk in investing in hedge funds that is far greater than the risk of investing in the other asset classes," the researchers said. Even the so-called fund of funds hedge funds, which try to diversify risks by investing in other hedge funds, display nearly as much variability in performance across funds in a given year as is exhibited across the entire universe of mutual funds. Moreover, from 1995 to 2003, the average fund of funds yielded only a 7 percent annual rate of return after deducting fees, well below that of the average mutual fund.

Picking a good fund is also dicey because there is little persistence in performance from one year to the next. The chance that a hedge fund that performed in the top half of the universe of funds in one year would do so again the following year is no better than 50-50, which raises the question of how the funds can command such high fees. Most hedge funds will be required to register and provide data to the Securities and Exchange Commission beginning in February 2006. While some people have argued that the S.E.C. already has too much to do, it would seem that collecting and disclosing information on performance is a small burden for the commission, and a great potential benefit to investors.

"As a free market person, I think markets work better when there is fuller and more accurate information," Mr. Malkiel said.

Add-on or carve-out? Tyler Cowen takes a stand on the Social Security private accounts debate, and says "some of each":

Universal 401(k) Accounts Would Bring the Poor Into the Ownership Society - New York Times: Of the current proposals to address income inequality, the universal 401(k) is the most likely to bring general prosperity. The core idea is simple. The federal government creates tax-free retirement accounts for lower-income Americans, supplementing private accounts where they already exist, and matching personal contributions to those accounts. The amount of the match would depend on the income of the family and how much they save.

Gene B. Sperling, senior fellow at the Center for American Progress and the best-known proponent of this idea http://americanprogress.org/issues/2004/01/b289151.html, calls for a mix of 2-to-1 and 1-to-1 matches, but of course the exact ratios depend on what we are willing to spend. Just as the earned-income tax credit pays poor people to work, the universal 401(k) would pay poor people to save. The idea is to bring the benefits of markets and investing to the poor. An H&R Block study ("Saving Incentives for Low- and Middle-Income Families: Evidence From a Field Experiment With H&R Block," by Esther C. Duflo, William G. Gale, Jeffrey Liebman, Peter R. Orszag and Emmanuel Saez, published in _The Quarterly Journal of Economics in November) indicated that lower-income Americans have a strong demand for easy-to-use matching retirement accounts. But currently only 55 percent of Americans working full time hold a job with a retirement savings plan; the rate is even lower for part-time workers and the poor. Thus the bottom 60 percent of taxpayers receives only 10 percent of the tax incentives for savings.

A universal 401(k) plan would spread these tax benefits more evenly and induce more Americans to save. As in current 401(k) plans, the assets would be protected from creditors, the account would be attached to the individual and thus be portable, and penalties would discourage early withdrawal. By directing the benefits toward the neediest, the universal 401(k) savings plan tries to increase economic security in a cost-effective manner. There is an obvious way to pay for a universal 401(k) plan. For every dollar spent on the universal 401(k), the federal government could spend one dollar less on Medicare and Social Security benefits....

America would move closer to President Bush's vision of an ownership society, while addressing income inequality. The poor get more upfront, and their longer-run gains are greater through the returns on induced savings. Historically, equity returns have far exceeded what banks pay on checking accounts, yet many lower-income Americans have little or no investment in the stock market....

The catch is this: the universal 401(k) plan would split the poor into two classes. The first group would allow savings to accumulate and reap the wonders of compound returns for their old age. But other low-income recipients would undermine the intent of the plan. Either they still would not save or, as the government added to their accounts, they would borrow more elsewhere or behave more irresponsibly toward their future in other ways. Their net positions would not much improve. The uncomfortable truth is that many of the most effective antipoverty measures leave more than a few people behind. A leveraged antipoverty plan offers incentives for the poor to change their behavior in a favorable manner; for these incentives to matter, it has to hurt not to save.... A successful universal 401(k) plan would have to be run as a tough-minded investment opportunity and not as a welfare program. It is an open question whether we have the political will to make this work....

A fiscally responsible universal 401(k) plan would not make everyone happy. Libertarians and conservatives would be suspicious of government-created accounts. Liberals might not like freezing or reducing future expenditures on Medicare and Social Security....

Indeed we liberals do not. An add-on, not a carve-out! Raise the money to fund the match for universal 401(k)s by uncapping the FICA tax!

Former president Gerald R. Ford said in an embargoed interview in July 2004 that the Iraq war was not justified. "I don't think I would have gone to war," he said a little more than a year after President Bush had launched the invasion advocated and carried out by prominent veterans of Ford's own administration.

In a four-hour conversation at his house in Beaver Creek, Colo., Ford "very strongly" disagreed with the current president's justifications for invading Iraq and said he would have pushed alternatives, such as sanctions, much more vigorously. In the tape-recorded interview, Ford was critical not only of Bush but also of Vice President Cheney -- Ford's White House chief of staff -- and then-Defense Secretary Donald H. Rumsfeld, who served as Ford's chief of staff and then his Pentagon chief.

"Rumsfeld and Cheney and the president made a big mistake in justifying going into the war in Iraq. They put the emphasis on weapons of mass destruction," Ford said. "And now, I've never publicly said I thought they made a mistake, but I felt very strongly it was an error in how they should justify what they were going to do."

In a conversation that veered between the current realities of a war in the Middle East and the old complexities of the war in Vietnam whose bitter end he presided over as president, Ford took issue with the notion of the United States entering a conflict in service of the idea of spreading democracy.

Konstantin Magin and I are closing in on the first draft of our "Future of the Equity Premium" paper...

SUMMARY: PRELIMINARY AND INCOMPLETE: DRAFT

The Future of the Equity Premium

J. Bradford DeLong and Konstantin Magin

December 2006

Suppose that, at the start of some year since the beginning of the twentieth century, you had taken $1,000,000 that you had invested in bonds and believed you would not want to touch for twenty years, and invested it insteade in a diversified portfolio of equities. (Or suppose you had been able to borrow $1,000,000 at the long-term government bond rate). And suppose you had then let both legs of that investment ride for twenty years. What would have been the results in dollars (adjusted for inflation) twenty years later?

The figure above tells you the answer, for each year from 1901, the start of the twentieth century, until 1986--twenty years ago.

In two years you lose: $50,000 if you invest in 1913, and $150,000 if you invest in 1929. In both years, you would have done better to invest in bonds. In all the other years--all 84 of them, 97.7% of the time--you win.

Often you win big. The average return is $4,356,000: more than four times the value of the initial long equity leg of the portfolio. 93% of the time you are up more than $500,000. 80% of the time you are up more than $1,000,000. 59% of the time you are up more than $2,000,000. 42% of the time you are up more than $4,000,000. 19% of the time you are up more than $8,000,000. And the champion moment to go long stocks and short bonds was 1942, just after Pearl Harbor, when your portfolio held until 1962 would have given you an edge of $15,600,000.

This is, in brief, the equity premium puzzle of Mehra and Prescott (1985). Throughout the twentieth century anybody with some initial wealth devoted to bonds and with a twenty-year or more time horizon had a near money machine at his or her disposal. And not a nickel-and-dime money machine either.

Rietz (1988) and Barro (2005) attribute the apparent equity premium to serious and severe risks of equity ownership that do not show up in the twentieth-century sample. The problem is that it is hard to think of what such risks might be. We have one Great Depression in the sample. Isn't that enough? And when the Day of the Revolution comes and the red flag flies from the towers of the Loop, investors in U.S. government bonds will be in no better shape than investors in corporate equities. At a more subtle level, Weitzman (2006) argues that the equity premium is generated by unknown unknowns--risks that we cannot characterize and that have the potential to have any conceivable effect on our expected utility. In Weitzman's framework, the anomaly is not that stock prices are so low but that they are so high: that the equity premium return is not still bigger than it has been. But once again there is the question of just what these risks are, and why they depress the relative price of stocks rather than bonds.

Once you put the possibility that the ex ante distribution of stock relative to bond returns had a big, important, substantial lower tail that just does not show up in the data ex post, attempts to explain the equity premium return as some kind of rational-expectations equilibrium for investors with reasonable degrees of risk aversion are likely to be in vain. You have to construct a scenario in which investors and markets are such that investors do not turn the crank on a money machine. And that is very, very hard to do.

An enormous variety of institutions and investors ought to have taken advantage of this money machine--sold their bonds and put their money in stocks: young parents of newborns looking forward to their children's college, the middle-aged looking at rapidly-escalating health-care costs, the elderly looking forward to bequeathing some of their wealth to their descendents or to worthy causes, workers with defined-contribution pensions, businesses with defined-benefit pensions, life insurance companies, the Social Security Trust Fund, the reserve accounts of the world's central banks, businesses with reputational capital that do not expect to be blindsided by new technologies, hedge funds, and so on. On the other side of the market, there are all the companies that appear underleveraged: replacing high-priced equity capital with low-priced debt capital would seem to have been as profitable a strategy for a long-lived company as investing in high-return equity rather than low-return debt is for a long-lived investor. Yet they have not done so, or have not done so on a sufficient scale to pick up all the $4,356,000 checks and the occasional $15,600,000 check left on the sidewalk. We can explain why any one particular group might have good reason not to try to take advantage of the equity premium, but it is much harder to come up with the many good reasons why all of the groups of potential investors, and institutions, and organizations passed the $4,356,000 checks by.

It's not that the existence of an equity premium return is a new discovery. In 1923 financial analyst Edgar L. Smith pointed out that diversified investments in American equities had far outperformed bonds of all types. Edgar Smith's (1923) Common Stocks as Long-Term Investments was not the first publication to point out that stocks earned higher returns than bonds on average-—that was well-known. But investments in equities were viewed then as the domain of the risk-loving and the entrepreneurial. Speculators—-either possessing inside information about fundamentals or market microstructure, risk-loving, or naïve—owned stocks. But prudent investors did not: the risk of ruin was seen as too high. What Smith did was to publicize the fact that equity diversification worked: diversified stock portfolios produced higher rates of return without bearing higher systematic risk than bond portfolios, especially once one took inflation risk into proper account. A portfolio invested in one or two individual stocks was overwhelmingly risky: "subject," Smith wrote, "to the temporary hazard of hard times, and [might] be permanently lost as a result of a radical change in the arts or of poor corporate management." But, Smith pointed out, these risks could be diversified away: "effectively eliminated through the application of the same principles which make the writing of fire and life insurance policies profitable." By contrast, portfolio diversification did not work for bonds, which were all "subject to the same hazards" which were "not reduced by increasing the number of different bonds held."

Some economists--Blanchard (1993) is probably the best advocate for this position--see the large premium equity return in the past as a mistake on the part of the market, a mistake that the market should be correcting. They anticipate that the equity premium is smaller in the present than it was in the past and that it will vanish or nearly vanish in the future. Blanchard sees the high equity premiums of the 1950s and the 1970s as a combination of excessive salience of the memory of the Great Crash and the Great Depression in investors' minds, and as the result of simple money illusion a la Modigliani and Cohn (1979).

But we do not see any signs that Ms. Market has moved to eliminate past mistakes. The real return on the 20-year U.S. Treasury inflation-protected bond is 2.1%, while the current annual earnings yield on the S&P composite stock market index is 5.7%. These numbers suggest an expected equity premium today of 3.6%, lower than the 6% premium equity return of Mehra and Prescott (1985), but far, far higher than the value of 0.25% per year of Mehra's (2003) baseline representative-agent model for a coefficient of relative risk aversion of 2. and an equity premium of 3.6% per year is enough to double your relative wealth over twenty years, and quadruple it over forty. Plus you get substantial immunity from long-run inflation risk as well.

The equity premium remains a puzzle. And there is no reason to think that it is a puzzle about to vanish. As Rajnish Mehra (2003) wrote:

The data used to document the equity premium over the past 100 years are as good an economic data set as analysts have, and 100 years is a long series when it comes to economic data. Before the equity premium is dismissed, not only do researchers need to understand the observed phenomena, but they also need a plausible explanation as to why the future is likely to be any different from the past. In the absence of this explanation, and on the basis of what is currently known, I make the following claim: Over the long term, the equity premium is likely to be similar to what it has been in the past and returns to investment in equity will continue to substantially dominate returns to investment in T-bills for investors with a long planning horizon.

Or as Warren Buffett wrote twenty years ago:

[T]he secret has been out for fifty years, ever since Ben Graham and Dave Dodd wrote Security Analysis, yet I have seen no trend toward value investing in the 35 years I have practiced it. There seems to be some perverse human characteristic that likes to make easy things difficult. The academic world, if anything, has actually backed away from the teaching of value investing.... It's likely to continue that way.... [T]hose who read their Graham and Dodd will continue to prosper.

December 27, 2006

p. 108 ff: In chapter 2 I mentioned the "blindsight" syndrome, in which a patient with visual cortex damage cannot consciously see a spot of light shown to him, but is able to use an alternative spared brain pathway to guide his hand unerringly to reach out and touch the spot. I would argue that this patient has a representation of the light spot in his spared pathway, but without his visual cortex he has no representation of the representation--and hence no qualia "to speak of."

Conversely, in bizarre syndrome called Anton's syndrome, a patient is blind owing to cortical damage but denies that he is blind. What he has, perhaps, is a spurious metarepresentation but no primary representation. Such curious uncoupling or dissociations between sensation and conscious awareness of sensations are only possible because representations and metarepreentations occupy different brain loci an can therefore be damaged (or survive) independently of each other, at least in humans....

The flip side of this is, just as we have metarepresentations of sensory representations and percepts, we also have metarepresentations of motor skills and commands such as "waving goodbye," "hammering a nail in the wall" or "combing," which are mainly mediated by the supramarginal gyrus of the left hemisphere.... Damage to this structure causes a disorder called ideomotor apraxia.... [I]f asked to "pretend" to hammer a nail into a table, they will make a fist and flail at the tabletop.... Or when asked to mime combing her hair a patient will make a fist and bang it on her head, even though she understands the instruction and is perfectly intelligent in other respects. The left supramarginal gyrus is required for conjuring up an internal image--an explicit metarepresentation--of the intention and the complex motor-visual-proprioceptive "loop" required to carr it out. That the representation of the movement itself is not in the supramarginal gyrus is shown by the fact that if you give the patient a hammer and a nail he will often execute the task effortlesly...

p. 147 ff: The second problem is why the sensations take the particular form that they do.... [Q]ualia--consider the manner in which we experience... wavelength... and pitch.... Even though wavelength is a continuous dimension we experience colors as four qualitatively distinct sensations--red, yellow, green, and blue.... Adjacent colors... are "miscible"... we can see orange as a blend of red and yellow and purple as comprising red and blue. But non-adjacent ones are immiscible... it is hard to even imagine a bluish yellow or a reddish green. Thus color sensations seem chopped up into four immiscible bits. But this isn't true of soundwaves... we hear the full range... as a continuum, with no breaks in qualia. All this is obvious, but the question is why....

The fact that different modes of experience apply to wavelength and pitch suggest that qualia cannot be epiphenomenal; they must have an evolutionary function--such as serving as a mnemonic aid....

Non-spectral colors are perhaps the strangest thing of all. There is no wavelength that is purple--purple is a mixture of short (blue) and long (red) wavelengths. As you go around the color wheel starting at red, you can shorten and shorten the wavelength and go smoothly through orange and yellow and green to blue and then, as you continue around the color wheel, you have to add long (red) wavelengths while keeping the blue wavelengths to get purple, and then take away the short (blue) wavelengths to get red. And there is nothing in your consciousness or its qualia to tell you what your retina knows very well: that going from red to blue through orange, yellow, and green is a very different process on the photon level than going from blue to red through purple. Not only do we have qualia, but they are very false to the way the universe really is. Purple is not a wavelength halfway between red and blue. Green is a wavelength halfway between blue and yellow.

Economists have three very different and opposed reactions when they look at the global configuration of asset prices:

For most of the past century risk and default premia have on average been too large to make sense as the appropriate price that a well-functioning utility-maximizing market would produce--so the fall in risk and default premia relative to historical averages is welcome.

Risk and default premia are much smaller than historical averages, and past experience suggests that these premia will return to their averages--which is scary, because it means some kind of a crash is likely.

Risk and default premia in markets are low relative to perceived geopolitical and other risks, but this is more-or-less what we would expect--if the world goes to hell in a handbasket, geopolitically or economically, we have no clue which asset classes will do least badly.

Here Larry Summers comes down on the side of reaction (2):

FT.com / Columnists / Lawrence Summers - Lack of fear gives cause for concern: The new year will begin with the greatest divergence for a generation between the general view of global risks as reflected by conventional wisdom and the risks as priced in financial markets. While the commentariat has been more alarmed about the state of the world than global markets for some years, the gap increased in 2006 as markets became more serene and everyone else grew more anxious.

The headlines and opinion writers focus on how the US is badly bogged down in wars in Afghanistan and Iraq; on an increasingly unstable Middle East and dangerous energy dependence; on nuclear proliferation that has already occurred in North Korea and that is coming in Iran; on the potential weakness of lame-duck political leaders in the US and other major democracies; on record global trade imbalances and rising protectionist pressures; on increased levels of public and private sector borrowing combined with record low saving in the US; on falling home prices and middle class economic insecurity.

At the same time, financial markets are pricing in an expectation of tranquillity as far as the eye can see. Stock prices in the US are at all-time highs. The risk premiums to cover the possibility of default that corporations or developing countries have to pay to borrow money are at or near historic lows. In addition, estimates of the volatility of the stock, bond and foreign exchange markets inferred from the prices of options are near record lows.

Why the divergence between the headlines and the markets? Will the journalists or the investors be proved right about the state of the world? Or will the divergence continue?

First, in spite of all the adverse news, the world economy in aggregate grew more during the last five years than in any five-year period since the second world war. The US is enjoying a rare combination of low inflation and 4.5 per cent unemployment and has not suffered a deep recession in a quarter of a century. Given the natural tendency of markets to extrapolate from experience, optimism is to be expected and is to some extent justified. The great danger is that optimism can become a self-denying prophecy if it leads to excessive extension of credit, irrational capacity creation and unsustainable levels of spending.

Second, some of the divergence between the editorials and the markets reflects the markets’ narrower focus. September 11 2001 was an epochal event, but not one that had a great impact on the cash flows of most corporations and did not have an enduring impact on market valuations. Those who liquidated positions during the transitory dip in the aftermath of the attacks probably regret having done so.

Whether markets are right to be so narrowly focused is less clear. They are surely right to recognise that even events of great historic importance may not affect the value of particular securities. On the other hand, there is the real possibility that they are myopic in not recognising that important geopolitical events can have lasting effects on the global economy. A turn towards protectionism, for example, would be unlikely to affect the ability of companies or nations to service their debt next year, but history suggests that over time such a turn would have profound effects on the ability of businesses to profit and countries to pay off debts.

Third, changes in the structure of financial markets have enhanced their ability to handle risk in normal times. The percentage of any loan a given institution has to hold has been reduced with increased securitisation and syndication.
It is natural that associated risk premiums have also declined. Greatly enlarged pools of speculative capital can also reduce volatility by pouncing any time an asset price gets significantly out of line. Financial innovation through derivatives has made the hedging of risk much easier. As institutions have become more sophisticated in their approach to risk, they have felt comfortable in taking positions they might have been reluctant to hold even a few years ago.

We do not yet have enough experience to judge what happens in abnormal times. As we observed in 1987 and again in 1998, some of the same innovations that contribute to risk spreading in normal times can become sources of instability following shocks to the system as large-scale liquidations take place. How dramatic increases in speculative capital and the use of credit derivatives and other hedging tools will affect the system’s response to the next large shock is a profoundly important but ultimately unanswerable question.

We will know much more about whether the market view and the general view can converge a year from now. In the meantime, it is fair for those who look to markets to point out that the easy path for the commentariat is to foretell disaster. If disaster occurs, it was foretold. If it does not, credit can be given for timely warning. Anyone who liquidated stock holdings a decade ago when Alan Greenspan, former Federal Reserve chairman, worried about “irrational exuberance” learnt painfully that for those who put money behind their convictions' unwarranted pessimism can be very expensive.

Equally, it is fair to point out to those who take comfort from the markets’ comfort that they hardly ever predict serious disruption and historically the moments of greatest complacency have been the moments of greatest danger. Over the past 20 years the world has confronted the 1987 market meltdown, the banking crisis of the early 1990s, the Mexican near-default in early 1995, the Asian financial crisis in 1997, Long Term Capital Management in 1998 and the Nasdaq decline and September 11 in this decade. While each of these events is unique, the record does suggest that crises occur in about in one out of every three years.

At least as far as the markets are concerned, perhaps the main thing we have to fear is lack of fear itself.

Buttonwood | Spread too thinly | Economist.com: Many investors in shares argue that the low levels of bond yields make stockmarkets look cheap. To take one example, emerging-market bond spreads (the excess yield over American Treasuries) are close to all-time lows... whereas emerging stockmarkets trade at their usual discount to developed-world shares.... [T]he perceived cheapness of debt is persuading private-equity groups that they can make big profits from buying quoted companies. And the prospect of such bid activity is keeping a floor under share prices....

Pension funds and insurance companies in the developed world have become more cautious... buying bonds in an attempt to match their liabilities. Furthermore, savers are no longer risk-happy Americans but Asian central banks.... [T]he massive growth of credit derivatives... has given investors the ability to sample the debt markets.... Abundant liquidity has persuaded people to accept lower yields as a result.... Companies have been extremely profitable, generating more than enough cash to service their debts; as a result, the default rate has been very low.... The debt markets seem to offer little scope to absorb bad news.... [W]hat will puncture that complacency? The most likely cause would be a big default.... Will the rapid emergence of credit derivatives and the greater role of hedge funds make markets more--or less--stable?...

Another fear is liquidity. Hedge funds have actively provided credit via leveraged loans. There is a risk that, just when borrowers get into difficulty, hedge-fund clients may demand their money back.... Plenty of people believe the financial system is more secure than before.... But the real test of a big recession has yet to be faced...

And yes, the farm bill that Bush called "a job well done" is yet another bad use of public money by the Republicans:

: Powerful Interests: One of the most remarkable examples of the farm lobby's power came in 2001 and 2002, when the existing farm bill was written, expanding payments again over the opposition of the White House and key lawmakers. Reformers see it as a cautionary tale. The architect of the legislation was Rep. Larry Combest....

With help from a generous mandate from the House Budget Committee -- chaired by Jim Nussle (R-Iowa) -- Combest produced a new farm bill in 2001 authorizing an eye-popping $50 billion, 10-year increase in price supports and income supports for farmers. He boasted that the measure was "a major step away from Freedom to Farm." For one thing, the bill restored a key pillar of the pre-1996 program: cash payments that compensate for low crop prices....

The Bush White House disliked Combest's bill. Chief political adviser Karl Rove saw it as the antithesis of fiscal responsibility. "We're Republicans," aides remember Rove grumbling. The White House budget office issued a stinging critique, saying the bill was too costly and failed to help farmers most in need. Combest also faced strong opposition from a disgruntled group of Eastern and Midwestern lawmakers, and from senators who wanted tighter limits on what a farm could collect each year. But Combest had a strong hand. "He hijacked the process," said a former USDA official who spoke on the condition of anonymity because he still deals with Congress.

At a meeting in Rove's office soon after the Sept. 11, 2001, attacks, Combest delivered a warning, according to several people with knowledge of the session. Unless the administration backed off, Combest warned, he and his farm-bloc allies would sink a top priority of President Bush's: legislation giving the president a free hand to negotiate a global trade treaty strongly favored by big corporations. "You have to ease up," one participant remembers Combest saying.

Over the next several months, the administration laid off its public criticism of Combest's farm bill. Combest withdrew his opposition to trade-promotion authority, and it squeaked through the House by a single vote.... In the House, Reps. Ron Kind (D-Wis.) and Sherwood L. Boehlert (R-N.Y.) had 145 signatures for an amendment that would tear up Combest's handiwork.... Among Kind's allies were "green Republicans" such as Rep. Wayne T. Gilchrist (R-Md.) and hunting and fishing groups championed by Rep. John D. Dingell (D-Mich.).... The Agriculture Committee's control over food-stamp funding -- a top priority for the black and Hispanic caucuses -- provided additional leverage. Combest's supporters "made it known that nutrition would be the victim" if the bill was rewritten, said Rep. Eva Clayton (D-N.C.), a member of the Congressional Black Caucus and the Agriculture Committee. "I encouraged members of the black caucus to vote against" the amendment, she said, "because of the nutrition impact." Kind's amendment was defeated 226 to 200, with the black caucus providing 10 critical "no" votes. The next day the House overwhelmingly approved Combest's farm bill.

The farm bill passed the Senate, too. But not before an amendment sponsored by Sens. Charles E. Grassley (R-Iowa) and Byron L. Dorgan (D-N.D.) was approved 2 to 1. It aimed to close loopholes.... As House and Senate negotiators met to reconcile the two versions of the farm bill, Combest chaired the meetings. When the final bill emerged, the Grassley-Dorgan changes had all but vanished.... "The simple fact of the matter is our Senate leaders let themselves be outmaneuvered," said Grassley, who voted against the final compromise version of the farm bill. "They were run over by Southern forces in the House, and they ended up with what the House wanted."

Grassley was not quite finished. He called the White House to lobby for a veto. "My reason was that the Senate had been sold out on everything," he said. But White House aides, aware of the importance of the farm-bill money to red states with midterm elections nearing, did not recommend a veto. Before signing the legislation, Bush praised Combest for a "job well done"...

Perhaps the most remarkable of many truly remarkable statements by Morgan, Cohen, and Gaul is that the Combest bill was approved "over the opposition" of the White House. No matter what Rove and his flunkies tell their favored stenographers at the Washington Post, the Bush economic agencies got no backup from the political shop in their attempts to derail or at least modify the farm bill to make it less destructive--no veto threats, no phone calls from Bush to the conferees saying the administration strongly favored the Senate version, no nothing. And of the claim that Karl Rove saw a 1/4 of 1% increase in federal spending as "the antithesis of fiscal responsibility"--well, only reporters both truly ignorant of the budget and in the tank could repeat that with straight faces.

Bruce Bartlett: Debts and deficits: On Oct. 11, George W. Bush went before the television cameras to proudly announce the budget deficit for fiscal 2006, which ended on Sept. 30, was only $248 billion. This was a great success, he said, because in February the Office of Management and Budget had estimated the deficit would be $423 billion.

If this is the standard for success, one wonders why we didn't do even better. All Mr. Bush had to do was order OMB to make an even bigger mistake than it did in estimating what the deficit would be. If it had wrongly projected the deficit to be $500 billion or $600 billion in 2006, then Mr. Bush could have announced an even bigger improvement. Maybe next year he should tell OMB to project a $1 trillion deficit. Then even if the deficit rises, Mr. Bush can congratulate himself for again beating expectations.

In the real world, of course, people measure progress not against some incorrect forecast but against actual results. By this standard, the numbers don't look as good. Mr. Bush inherited a budget surplus of $128 billion in fiscal 2001, which the government was already in the midst of when he took office. By the following year, fiscal 2002, the surplus was gone and the government had a deficit of $158 billion, which rose to $378 billion in 2003 and $413 billion in 2004, before falling to $318 billion in 2005 and $248 billion last year.

But these figures greatly understate the budgetary turnaround. In January 2001, the Congressional Budget Office (CBO) estimated budget surpluses as far as the eye could see. It projected an aggregate surplus of more than $2 trillion between 2002 and 2006. Instead, we had an aggregate deficit of $1.5 trillion -- a deterioration of $3.5 trillion.

Yet these figures still understate the budgetary damage caused by the Bush administration because it leaves out changes in the budgetary status of entitlement programs such as Social Security and Medicare. The federal budget only measures their current cash receipts and outlays. Because these are permanent programs not subject to annual appropriations, it is necessary to look at their budgets in what accountants call accrual terms -- taking into account future commitments already made....

[T]he government's total indebtedness... Social Security and Medicare, which have projected costs far in excess of projected revenues. Over the next 75 years, these two programs have an unfunded liability of $44 trillion -- $15 trillion for Social Security and another $29 trillion for Medicare.

What is really frightening is that Mr. Bush apparently has no clue the problems of Medicare are twice as bad as Social Security's.... Mr. Bush has said we must fix Social Security... while saying nothing about the way Medicare is hemorrhaging money. He can't because his massive, unfunded program for prescription drugs in 2003 is the principal reason Medicare's financial problems have gotten so much worse since 2002.

First off--wow. I think both the New York Times and the sociologists of America have some basic self-policing to do:

Our Overrated Inner Self: By ORLANDO PATTERSON: Lionel Trilling... [said] [s]incerity... requires us to act and really be the way that we present ourselves.... Authenticity involves finding and expressing the true inner self.... Authenticity now dominates our way of viewing ourselves and our relationships, with baleful consequences.... [I]t is the inner source of identity politics. It also undermines good government.... The cult of authenticity partly accounts for our poor choice of leaders. We prefer leaders who feel our pain, or born-again frat boys who claim that they can stare into the empty eyes of an ex-K.G.B. agent and see inside his soul. On the other hand we hear, ad nauseam, that Hillary Clinton, arguably one of the nation’s most capable senators, is “fake” and therefore not electable as president...

Orlando Patterson simply does not speak the same English language that the rest of us speak or live in the same world that the rest of us live in. I have never heard anybody say or imply--let alone ad nauseum--that Hillary Rodham Clinton should not be president because she is "sincere but inauthentic." I have never heard anybody say or imply that they preferred either Bill Clinton or George W. Bush to other candidates because Bush or Clinton was "insincere but authentic."
It's amazing. Four hundred million people in the world whose first language is English, and this is what the *New York Times finds to publish.

Second, we have David Ignatius in the Washington Post telling us that Bush's agonizing sorrow over Iraq is truly "poignant":

David Ignatius - Bush's New Look on Iraq: Weary - washingtonpost.com: The stress of the job -- so well hidden for much of the past six years -- has begun to show on Bush's face. He often looks burdened, distracted, haunted by a question that has no good answer. When a photographer captures him at ease, as in a sweet Texas-romance picture of Bush and his wife, Laura, that appeared in People magazine last week, it's as if he has escaped the Iraq sweatbox....

Bush and his officials are strong characters; they work hard not to let you see them sweat. But the anguish and exhaustion are there. Bush is not a man for introspection... the forced jocularity.... That's why this version of reality TV is so poignant: This very private man has begun to talk out loud about the emotional turmoil inside. He is letting it bleed. Bush opened the emotional curtain... gave an unexpectedly personal answer: "Most painful aspect of my presidency has been knowing that good men and women have died in combat. I read about it every night. And my heart breaks for a mother or father or husband or wife or son and daughter. It just does. And so when you ask about pain, that's pain."

With special bonus incoherence about whether Bush is or is not in a state of denial:

Bush's "state of denial," as Bob Woodward rightly called it, has officially ended. He actually spoke the words "We're not winning" last week in an interview with The Post, coupling it with the reverse: "We're not losing." But in truth, he cannot abide the possibility that Iraq will not end in victory. So a day after his "not winning" comment, he half took it back, saying: "I believe that we're going to win," and then adding oddly, as if to reassure himself: "I believe that -- and by the way, if I didn't think that, I wouldn't have our troops there. That's what you've got to know. We're going to succeed."

Third, the Wall Street Journal editorial page:

The Wages of Growth - WSJ.com: [W]e can discount one more canard about the current economic expansion -- namely, that wages are stagnant and workers are doing far more poorly than they did in that second Age of Pericles known as the 1990s.

Over the past year, the real average wage for non-supervisory employees has risen 2.8%... real median household income was also up 1.1% after inflation. This rise in take-home pay helps to explain how Americans have had the disposable income this Christmas shopping season to pay $600 for Play Station 3 computer games and $150 for the Kid-Tough Digital Camera for three-year-olds.

It is true that income and wages are still about 2% below the peak they hit in 2000.... [But] the "stagnant wages" story can join the "jobless recovery," the "outsourcing" crisis and the runaway budget deficit as other tales of woe that have all turned out to be evanescent....

All told, the pattern of wage growth this decade isn't all that different from that of the 1990s.... This isn't to disparage the 1990s, but only to point out that those who assail this decade's gains either have short memories or political agendas.

We certainly agree with those who'd like to do more to lift worker paychecks, so here are two ideas. First, make the Bush tax cuts permanent.... Second, slash the corporate income tax. A recent study for the American Enterprise Institute by economists Kevin Hassett and Aparna Mathur examined 72 nations over 22 years and found that "wages are significantly responsive to corporate taxation"...

Fourth, George Archibald gets medieval on the whole Washington Times--and asks why so little of this is "newsworthy" to the conventional media. It has always amazed me that any other journalistic outfit will employ anybody who has ever worked for the Reverend Moon-funded Washington Times.

Hey! You worked for them, George:

GEORGE ARCHIBALD: CAN THE WASHINGTON TIMES SURVIVE?: I doubt it... festering internal civil war... ideological and abusive micro-management... driven out the newspaper’s ... intolerant abuse and rejection of him by Joo. Slevin... just gave up... Joo... a tyrannical maniac... Slevin... one of the finest, nicest, most erudite, capable, calm, kind, sensitive, and fair individuals I have ever dealt with....

[U]nfolding scandal... chief photo department editor... eye for young women photographers... made sexual overtures to photographers as they applied and sought employment.... Complaints... went nowhere, upper management knew... photo department employees left in disgust.... [A]nemic old reporters who no longer break exclusives... inexperienced, young new hires who couldn’t find their way to a copy of the federal budget....

The TWT business side... a disaster for years, moribund advertising, circulation well under 100,000... a yearly money-loser despite more than $3-billion of cash infused by founder Sun Myung Moon, the controversial Korean religious evangelist....

[T]he main cause... top management... CEO Dong Moon Joo... Wesley Pruden... Fran Coombs.... Pruden... an unreconstructed Confederate... believes the South and slavery were right and President Abraham Lincoln was wrong.... Pruden’s father was a Baptist minister and chaplain for the White Citizens Council in Arkansas’ worst KKK days.... Pruden... not a religious man... unmarried all his life except a brief period in his young adulthood... hates feminists and homosexuals.... [L]eft The Dow Jones National Observer... accusations of manufactured quotes.... Pruden micro-manages the paper’s news and opinion content mainly from home via computer. Pruden comes to 4 p.m. editor news conferences... few reporters... have even met him personally.

Coombs... raging racist... despises blacks, Jews, and Hispanic immigrants... a micro-manager... very bad temper, abuses employees, and looks down on women (except if he sees one he says has “nice tits” or “nice body,” or “nice ass” or who he would like to have sex with, which he often voiced in my presence, including about a particular higher female editor who was his superior.) Coombs... voiced dislike for blacks, Jews, Hispanics... always when he got drunk at parties... drank liquor and smoked marijuana... passed out on the outside deck of his home and had to be physically carried to bed by those remaining at the party and his wife, Marian.... Coombs’ management style... prejudices, and abuse of employees that has led to the brain-drain of reporters and editors over the past decade.... [A] corporate struggle... between... Dong Moon (Douglas) Joo, who is the Reverend Moon’s Korean translator in many venues and has been his go-fer for many years, and the reverend’s youngest son, Preston Moon... anointed by his father as corporate successor....

Dong Moon Joo, Wesley Pruden, and Fran Coombs have apparently blocked Preston Moon.... Pruden and Coombs... sabotage[d] the company’s successful restart of its Insight Magazine as an online news and opinion website.... Pruden and Coombs have coopted Joo and the Koreans by telling them, and convincing them, that they have President George W. Bush and his administration in their pocket....

One wonders why all the so-called media watchdogs in the media are not following this story and have not reported it fully to the American public. Why are they asleep at the switch?... Maybe the dominant liberal media elite want that to happen and the mainstream media are giving the Joo-Pruden-Coombs cabal a pass regarding the reported racism and other employee discrimination http://www.thenation.com/doc/20061009/washington_times...

Bush's "state of denial," as Bob Woodward rightly called it, has officially ended. He actually spoke the words "We're not winning" last week in an interview with The Post, coupling it with the reverse: "We're not losing." But in truth, he cannot abide the possibility that Iraq will not end in victory. So a day after his "not winning" comment, he half took it back, saying: "I believe that we're going to win," and then adding oddly, as if to reassure himself: "I believe that -- and by the way, if I didn't think that, I wouldn't have our troops there. That's what you've got to know. We're going to succeed."

Wow, does it s--- when your material rebels against the frame you try to force it into.

Funny Ignatius-related story. In April of 2003, I went home to my mother's for Passover. Ignatius was in Iraq, and he needed to reach Kanan Makiya. He knew I had Kanan's number, so he rang me from Baghdad. Unfortunately, I was out cold, so my mother answered. "It's David Ignatius calling," he told my mom. "I'm very important." My mother was furious and woke me up. Now, I maintain to this day that the guy must have said "It's very important," since no one would ever call up a total stranger and announce his own inherent value, and after all, the guy was calling from 8,000 miles away. But still, my mother holds Ignatius in high contempt. (My father likes his spy novels.)

Spencer Ackerman on James Jesus Angleton:

Saw The Good Shepherd with Matt and Tom last night. They didn't really like it much; I did. DeNiro -- who for some reason named the Wild Bill character Sullivan instead of Donovan -- basically made Spookfellas. I see Kurt Loder contended that the film doesn't have a story so much as it presents a "corporate biography." That's not really right. The James Jesus Angleton character, Edward Wilson, takes us through the development of This Thing Of Ours and through his descent, we see what the dark side does to us as a country -- we become shortsighted, parochial, paranoid, craven, brutal. It's not unlike how Henry Hill took us through Goodfellas.

This is all underscored by a brief but hilarious scene with Joe Pesci in which Pesci, a vulgar, family-oriented mafioso, expresses fear and impotent hatred of Matt Damon's Wilson.

One quick thing about counterintelligence master James Jesus Angleton. (One of his handles was "the Good Shepherd.") If we're to view the Wilson character as Angleton, DeNiro presents a remarkably subtle and often sympathetic portrayal of Angleton. Wilson is presented as, at worst, moderately paranoid. Angleton believed Henry Kissinger was a Soviet agent. Wilson dips his toe into domestic spying. Angleton was the architect of a massive spying campaign targeting elements within the antiwar movement, which is what led to his downfall. In short, if Wilson really is Angleton, he starts off and ends up with way too much of a soul. Indeed, Angleton's excesses make Michael Ledeen's enthusiasm for the man appear all the more... eccentric, I believe, is the nice word.

Spencer Ackerman on Even the Neoconservative New Republic:P

Merry Christmas, I don't want to fight tonight:

Dear Jon [Chait],

A long time ago, we used to be friends. My best wishes go out to you, Robin, Joanna & Benjy for a happy and prosperous New Year. You remain one of the brightest lights of American liberalism, and for that, we owe you a debt of gratitude. Please believe me when I say I'm being sincere.

That said, I read your column with some dismay. The points you make about neoconservatism playing itself by its association with Bush on the Iraq war apply with greater force to, well, The New Republic. After all, the Standard et. al. had something to gain by the pact they made -- their emergence as the court philosophers of the administration. The magazine, and yourself, had no such investment. You, better and earlier than anyone else, pointed out that the central fact about Bush is that he's a liar. And yet, for a variety of reasons, you and the magazine bought the war.

Now, TNR's editorial position, which I shared at the time, was that there was a broader democratization project that the war advanced, and despite the demonstrated venality of Bush, the project was worth supporting. You didn't buy this, and much to your credit. Your arguments had to do instead with what you believed about Saddam Hussein, WMD and the world order. The trouble with this, as you would probably concede at this point, is that it reduced in late 2002 in significant ways to believing Bush. What I mean by that isn't simply a matter of accepting Bush's statements about WMD. I mean as well that one needed to buy -- or at least suspend disbelief about -- Bush's contentions about the jolly outcomes of removing Saddam. You point out in your column that the Standard and others had coherent reasons to disbelieve that the mission was feasible given the size of the military. But they went along, for the bargain described above. Why did you?

You might object that this is a matter of score-settling, pursued by a disgruntled ex-TNR employee who in any case went along with the war himself. Fine. But I don't mean it like that.... Decent and well-intentioned people can believe widely divergent things about the way Iraq will look after a U.S. withdrawal. However, I would ask that you consider whether your thinking about this question is implicated in the same self-suckering dynamic you identify in your column. Because you're too smart and too good for that...

Spencer Ackerman watches the U.S. arrest Iranians in Iraq:

An international incident in the making. Iranians detained by U.S. forces in Iraq, despite the wishes of the (sovereign!) Iraqi government. One "Western official" helpfully explains to the New York Times that the detentions are "based on information." It just gets better and better!

In the raids, the Americans also detained a number of Iraqis. Western and Iraqi officials said that following normal protocol, the two Iranian diplomats were turned over to the Iraqi government after being questioned. The Iraqis, in turn, released them to the Iranian Embassy. An Iraqi official said his government had strained to keep the affair out of the public eye to avoid scuttling the talks with Iran that were now under way....

All in the car were detained by the Americans. The mosque’s imam, Sheik Jalal al-deen al-Sageir, a member of Parliament from Mr. Hakim’s party, said the Iranians had come to pray during the last day of mourning for his mother, who recently died. He said that after the Iranians left, the Iranian Embassy phoned to say that they had not arrived as expected. “We were afraid they were kidnapped,” Sheik Sageir said.

But he said he was later informed that the diplomats, whom he said that he did not know well, were in the custody of Americans. “I had nothing to do with that,” Sheik Sageir said. “I don’t know why the Americans took them.”

The predawn raid on Mr. Hakim’s compound, on the east side of the Tigris, was perhaps the most startling part of the American operation. The arrests were made inside the house of Hadi al-Ameri, the chairman of the Iraqi Parliament’s security committee and leader of the Badr Organization, the armed wing of Mr. Hakim’s political party.

Another helpful U.S. official calls this a "clarifying moment" and explains that "It's our position that the Iraqis have to seize this opportunity to sort out with the Iranians just what kind of behavior they are going to tolerate." So, if we understand this correctly: We're going to force the Iraqi Shiites to deliberately insult Iran in order to compel a choice between us and them. We're going to do this at a time when we're trying to use Abdul Aziz al-Hakim as a wedge to gain Shiite support and marginalize Moqtada Sadr.

Now, if I'm Hakim, I seize this opportunity. I denounce the U.S. aggression, demand the release of all Iranian detainees, proclaim my desire for a new era of peaceful coexistence with Iran, etc. Maybe I even demand an American apology. Through the other side of my mouth I tell Washington not to worry; and that if they're for-reals about promoting me as an alternative to Moqtada, I need this to gain some street cred. And if any Sunnis are upset about my closeness with Iran -- well, fuck the Sunnis; they don't vote for us anyway.

But if Bush really wants to "clarify" that he has a willing Shiite vassal, then ignore the above paragraph. On the lounge chair next to the couch, Matt suggests, probably correctly, that the history of imperialism holds that this was probably a spur-of-the-moment decision by some low-level official with no coordination with Washington, and now it's all gone pear-shaped. I buy that for now. Now, Bush and Hakim might in fact be able to use this to their advantage, but it would require a degree of cleverness and prioritizing that's been altogether absent from the occupation so far. So expect the worst! It'll probably happen.

A key question -- with an unknowable answer -- is: How many Americans would have died in post-9/11 attacks if we had not chosen the path of fighting back?

And Scott gives the obvious answer:

[Since] Iraq had no substantial connection to Anti-American terrorism and posed no security threat whatsoever to the United States, the overwhelmingly likely answer is "zero." Whatever Iraq was, it wasn't "fighting back" against the Islamic radicals who actually attacked New York.

Of course, if it was only Republican pundits who don't actually know anything about foreign policy who think that replacing a secular dictatorship with an Islamist quasi state was an effective way of "fighting back" against Islamic terrorism, this would be relatively harmless (although pathetic.) The truly appalling thing is that people actually in charge of American policymaking also didn't demand any logical connection between a given military response and the actual threat facing the country, and as a result nearly three thousand Americans and hundreds of thousands of Iraqis have died for nothing.

But if they were less ignorant, Scott, they wouldn't be right-wing webloggers, would they?

In This Town, Even a Mall Rat Can Get Rattled - New York Times By KEN BELSON: It is fitting that the first store drivers heading south on Route 17 see as they enter town is a Stop & Shop. After all, Paramus is one of the nation's strongest shopping magnets, generating roughly $5 billion a year in retail sales.... [F]ew places rival the sheer concentration of stores in this otherwise unremarkable suburb 18 miles northwest of Times Square. In an already densely populated state, Paramus has more parking spots than people. Four major malls and dozens of smaller shopping centers are packed into 10 square miles.... The town has 27,000 residents, and about 2,700 stores. There is a Saks Fifth Avenue and a Sears; at least two dozen chains, including Borders, Old Navy and Macy's, have more than one outlet within Paramuss boundaries.

It is a Faustian bargain that brings 200,000 cars a day into town during December, turning the roads into virtual parking lots, but also keeps property tax rates in Paramus relatively low -- $1.55 per $100 of assessed value, compared with $3.88 in Maywood, the next town over. And there is no sign of letup: two of the four malls are spending $100 million each to spruce themselves up, big-box stores are sprouting where strip malls and bygone department stores once sat, and traffic seems to get worse each year....

Residents have groaned about the traffic for years, but largely put up with it because of how much money visitors spent in the town's stores. They also won reprieves on Sundays, when the town prohibits sales of practically everything, making Paramus a virtual ghost town...

The fact that Paramus grows even with Sunday closures is, I think, the most fascinating thing in the article>

Marginal Revolution: Arthur Pigou wasn't a KGB agent after all: Or so it seems. For twenty-five years I thought he was. As I recall, the John Costello and Richard Deacon books said he recruited impressionable young British men to the Soviet side. Now, using Google BookSearch I read that he was mistakenly accused. Pigou, by the way, no matter what his politics, remains one of the most underrated economists. He was, among other things, also a father of behavioral economics.

Problems with the Bush AIDS initiative. How serious are these problems? I don't know:

Mercury Rising: Gosh, What a Surprise: George W. Bush basically started his own AIDS-fighting program so that the funding wouldn't go to providing nasty evil things like condoms and sex education.

That's the official story, anyway.

Seems there was another reason, and if you've been paying attention the last six years you can probably guess what it is:

No accountability.

President Bush's ambitious AIDS-fighting program in poor countries has pushed so hard for fast results that basic record keeping and accountability often went by the wayside, making it hard to judge the true success, according to government audits and officials. Investigators found the three-year-old, $15-billion program has overcounted and undercounted thousands patients it helped or was unable to verify claims of success by local groups that took U.S. money to prevent the spread of disease or care for AIDS victims and their children.

Makes you wonder how much of the money never quite made it all the way to the services it was intended to provide, doesn't it? Specifically, how much of it ended up in the wallets of people who contributed to the Bush Administration?

Is it irresponsible to speculate? It would be irresponsible not to.

I think that the important point is that the Bush administration has tried as hard as it can to make it impossible for us to ever know.

ThinkGeek :: Levitating Desktop Globes: These electromagnetic suspended globes are actually high-tech instruments. A magnetic field sensor permanently measures the height at which the globes are suspended. This sensor feeds that data into a micro computer in the base of the unit. This computer than calibrates the electronic magnets at the top of the frame based on the distance between the globes and the top magnet to keep the globes correctly positioned. All in the blink of an eye! So not only do these look great on your desktop levitating in thin air, they are also technology marvels!

When you initially get your globe and plug it in, it may take you a few minutes to correctly position the globe in between the base and top magnets. You'll figure it out quickly enough and before you know it, you'll be able to set it up in just a few seconds every time. Once it's levitating, you can even spin it slightly and watch the globes rotate for extend periods of time. Just like the real thing, except you get to control gravity ;)

Your choice of either a 4" or 8" diameter globe. The 4" model (8 inches tall including frame) features an attractive brushed metal silver frame. The 8" globe (14.5 inches tall including frame) comes with a chrome finished frame with a black and multi-colored globe...

It's now cheaper to have a computer sense the position of the globe and increase or decrease the strength of the top magnet in order to pull the globe up or down than to have a cradle of magnets underneath...

John Scalzi watches as Dave Itzkoff begins another round of the Heinlein Wars:

Whatever: NYT Review Fallout: There's been some interesting commentary and discussion following Dave Itzkoff's NYT Book Review piece on me and my books, so I thought I'd post links to some of them I've found, for the edification of Whatever readers. In no particular order: Instapundit notes the piece, and has some thoughts on the idea of [Robert Heinlein's novel] Starship Troopers being fascist, roping in Spider Robinson to rebut that claim...

I would dispute Scalzi's claim that either Glenn Reynolds or Spider Robinson has "thoughts" on this issue. I would characterize them as having "reflexes."

Johnny Rico's story: How a young, naive upper-class twit gets transformed into the human equivalent of a Bug warrior--someone who will fight bravely and fiercely without regard for his own probability of survival in the interest not of liberty, utopia, or justice, but of the biological expansion of the human race.

The historians and moral philosophers: the military of Sergeant Zim and Colonel DuBois, who seem to me to be, well, fascist in the technical sense of the term. The German philosopher Ernst Nolte's classic Fascism in Its Epoch (and he should know: he's a somewhat creepy character himself) set out four key characteristics of fascism:

strong belief that--through social darwinism--morality is ultimately tied to blood and race, understood as descent and genetic relationship;

strong rejection of the classical "liberal" belief that individuals have rights that any legitimate state is bound to respect;

an assertion, in its place, that what individuals have are duties to the state, seen as the decision-making organ of the race; and

a strong fear of Marxist communism, and a willingness to use communism's weapons--suspension of parliamentary democracy, mass propaganda, rallies, street violence, and so forth--to combat it.

The sympathetically-drawn teachers in the military preach the first three of these at great length in the novel, and otherwise remind me of dear little Ellen May Ngwethu.

The authorial persona, the narrative voice, who adopts the same point of view as do the historians and moral philosophers, and adds on the fourth of Nolte's key characteristics of fascism--the strong fear of Marxist communism, and an eagerness to use its very own weapons (suspension of parliamentary democracy, mass propaganda, rallies, street violence, and so forth) to combat communism. Consider the fear of the Bugs as a mighty adversary ("we were learning, expensively, just how efficient a total communism can be when used by a people actually adapted to it by evolution" (p. 152)). Consider the invented historical background of the novel, in which the twentieth-century United States collapsed because of its excessive solicitude for individual rights and its worship of the words of Thomas Jefferson and was replaced by the "veterans' government" that made no claim to derive its powers from the consent of the governed. Thus the authorial persona is "fascist"--where "fascism" is not just an insult, but is a descriptive label for a certain viewpoint that has been tragically common in twentieth-century politics.

I would, today, add that by now more people remember the Starship Troopers movie than remember the Starship Troopers book. And Paul Verhoeven explicitly uses the visual tropes of World War II movies to make the movie "fascist". As Moe Lane once wrote:

Obsidian Wings: Movies That Must Not Be: Not movies that should not be, nor movies that we wish never were: movies that simply cannot be actually real, because otherwise the fabric of reality would begin to unravel and then we'd have nowhere to put our stuff. All entries to this - well, not contest - must thus be of 'films' that appear to have some evidence of existing for some inexplicable reason. Please note the title, why it Must Not Be and a plausible reason that explains away the aforementioned evidence for existence. For example....

Starship Troopers: While the idea of a Gestapo Doogie Howser does admittedly have a special appeal, if Verhoeven had dared make a movie anything remotely like the rumors he would have been messily assassinated by now by an angry mob of Heinlein fans. He's still alive, right? So therefore he didn't do it and the 'script' that's circulating around is merely a (well-deserved) smear campaign against the director...

December 24, 2006

Rubin and us spearcarriers moved heaven and earth to restore fiscal balance to the American government in order to raise the rate of economic growth. But what we turned out to have done, in the end, was to enable George W. Bush's right-wing class war: his push for greater after-tax income inequality."

This may be the naive part, but I want to have more faith in voters.... [I]f Democrats do what is best and follow a very specific, well communicated strategy, voters will reward them. I don't think Democrats should condition their policies on what the Republicans might do should they seize power again. Democrats need to do what is best according to their core principles and according to what they believe best serves the interests of voters generally....

[T]o me the optimal way to proceed is to pick a best strategy
irrespective of what might happen if you lose to Republicans in the future,
communicate it to people clearly so they know you see the problems and are
moving toward a workable solution, and propose and implement the policies with
single-minded, stay the course determination....

I believe voters would respond positively to the Democrat party if it vigorously defended a well-articulated plan to bring Social Security, Medicare,
and other programs into balance... and made it clear that it was leaving politics by the wayside....

Paul Krugman has been doing this a lot longer than I have, and he has proven time and again to be right when he has given advice. But I prefer not to worry about how Republicans might take advantage of Democrats who do their best.... If Democrats do their jobs right and get these problems under control, they shouldn't have to worry about Republicans....

Finally, along those lines, to Brad DeLong: Don't feel it was all for nothing. The Republicans were going to cut taxes one way or the other, surplus
or not, come hell or high water (both came...). While the surplus you and others worked so hard to create may have facilitated the tax cuts to some extent, it may have also protected valuable social programs.... There very well may be many children who, without your efforts to move "heaven and earth to restore fiscal balance to the American government," would be having a much worse Christmas this year...

Teh Worst Ombudsman Evar rears her ugly head. The Washington Post's Deborah Howell complains about having to deal with nasty email, and has no sympathy for us who have to deal with her columns:

Deborah Howell - Looking Back, One Year Later - washingtonpost.com: Allegations of bias are difficult. My mail reflects the partisan divide... with conservatives and liberals frustrated and angry. Readers of dissimilar political persuasions will see the same set of facts differently and may read something into a story that isn't there....

This has been a tumultuous year... watching companies die and merge, seeing good journalists laid off or taking buyouts, dealing with bloggers and nasty e-mail. More than 70 staffers took The Post's early-retirement offer.... The Post will have fewer people reporting... those who are doing it will have to work harder.... But... contraction could make The Post crisper, more compact and more readable.... Readers want to know only so much.... The Post needs to be edited to respect readers' time.

My most harrowing experience this year was making a mistake last January in a column about the disgraced lobbyist Jack Abramoff. The error won't be repeated here, but the backlash was obscene and stunning. Mercifully it went away fairly quickly. Journalists hate to make mistakes; I've never known one made deliberately...

It seems to me that there was a very deliberate mistake made by Deborah Howell in her Abramoff column:

Getting the Story on Jack Abramoff: Republicans [complain that] The Post purposely hasn't nailed any Democrats [in the Abramoff scandal]. Several stories, including one on June 3 by Jeffrey H. Birnbaum, a Post business reporter, have mentioned that a number of Democrats, including Senate Majority Leader Harry Reid (Nev.) and Sen. Byron Dorgan (N.D.), have gotten Abramoff campaign money. So far, Schmidt and Grimaldi say their reporting on the investigations hasn't put

Democrats in the first tier of people being investigated. But stay tuned...

I'm not reading the insinuation that some first-tier Democrats being investigated would be served right up into Deborah Howell's column. It's right there. The insinuation was false, and Deborah Howell knew that it was false when she made it.

Any apology when called on this? Nope:

The Firestorm Over My Column: I will reject abuse and all that it stands for. To all of those who wanted me fired, I'm afraid you're out of luck. I have a contract. For the next two years, I will continue to speak my mind. Keep smiling. I will.

Meanwhile, we are looking forward to The Christmas without an Oven, as the electronics malfunctioned last week and blew out the bake heating elements in both the upper and lower ovens. Oven repair has been called but...

Any connection between the blowing-out of the oven heating elements and the continued crashing of MarsEdit when it tries to access blogger is still speculative at this time.

And perhaps our information stream itself is being corrupted. I mean, a crab cioppino recipe that calls for eight pounds of crab and only half an onion?

We successfully got out of Whole Foods by 11:00 AM on Christmas Eve morning. We wouldn't want to be there now. We didn't really want to be there then, but where else can you get grass-fed organic antibiotic-free crabs?

The real before-tax return on equity is the sum of three returns: the income return, the anticipated capital gain, and the unanticipated capital gain. The income return is the ratio of dividend to price. This ratio has been high, over 3 percent, for much of the postwar period because high tax rates have implied a low price of equity. Recently it has come way down and is now a little over 1 percent.

The anticipated capital gain is equal to the growth rate of productive assets, which was roughly 3.5 percent per year and is now down to around 3.3 percent.

The unanticipated capital gain is the growth in the price of equity due to unanticipated changes in tax rates. This growth rate has changed, falling from the range of 1 to 2 percent to 0 percent.

Adding these rates, we would expect an 8 percent (e.g., 3+3.5+1.5) real before-tax stock return in the early postwar period and, barring any further unexpected changes in tax rates, a return in the future that is a little over 4 percent (e.g., 1+3.3+0).

This raises the question, why was debt held if equity earned such a high return? In the early 1960s, over one-third of the 1.1 GDP of debt held directly or indirectly by households was held as pension and life insurance reserves. At that time, almost all of the assets held in these reserves were debt assets. The reason is that there were legal constraints imposed on fiduciaries to ensure sufficient liquidity for timely distributions and to ensure prudent investing.

A large amount of debt assets were also held directly by households for liquidity purposes. For some households in the early postwar period, debt assets were their main avenue for saving because transaction costs made holding a diversified stock portfolio infeasible.

An important corollary of our findings is that there is no equity premium puzzle in the postwar period. Mehra and Prescott (1985) found that the high return on equity relative to debt was puzzling because theory says that the premium for bearing non-diversifiable risk is small. Their finding lead many to conclude that growth theory cannot account for the historical facts concerning asset prices and returns, unless a fundamentally different preference ordering is assumed. We find that this is not the case once we take into account observed changes in taxes and regulations...

The way I see it, the return on equities re is equal to the sum of the dividend yield d and the capital gain g:

re = d + g

And the capital gain g can be divided into an expected component E(g) and an unexpected component g - E(g):

re = d + E(g) + (g - E(g))

McGrattan and Prescott say that this third component is 1.5% per year in the post-WWII U.S., due to unexpected reductions in taxes on capital income, and I understand that and why they say that and I agree that it is a reasonable estimate.

re = d + E(g) + 1.5%

McGrattan and Prescott then say further that E(g), the expected capital gains component, is equal to the rate of growth of real GDP, which is the sum of labor-force growth and the rate of growth of labor-augmenting productivity, which they say amounts to 3.5% per year. I agree that the sum of labor-force and labor-augmenting productivity growth is about 3.5% per year, and I agree that we can treat the U.S. economy as near enough to a steady-state with a constant capital-output ratio to say that the stock of productive assets is growing at that same 3.5% per year. But the growth rate of the stock of productive assets is not equal to expected capital gains. Capital gains plus net issues--call it ni--equals expected capital gains:

E(g) = ni + 3.5%

Which gives us:

re = d + ni + 5%

At this stage I am expecting McGrattan and Prescott to make an argument about why it has been the case that d=3% and ni=0% in the post-WWII economy. It doesn't come. Instead, they just assert that because d has been 3% "we would expect an 8 percent... real before-tax stock return" and "there is no equity premium puzzle in the postwar period."

This makes no sense to me. Suppose stocks had sold for half the value they actually have, so that dividend yields were 6% over the early post-WWII period. Would they then say that "we would expect an 11 percent real before-tax stock return" and "there is no equity premium puzzle"? That dividend yields have not been much lower than they were is not an explanation of but a feature of the equity premium puzzle.

If McGrattan and Prescott want to provide an equilibrium explanation for the 8% real return and claim that it is not puzzlingly high, then aren't they obligated to provide equilibrium explanations for all the pieces of it? We need to understand why the average dividend yield was 3% (rather than 6% with prices half their actual levels or 1% with prices three times there actual levels) if we are going to see this as an explanation rather than as an accounting identity: given that returns were so outrageously high and that capital gains were roughly 5%, dividend yields had to have been 3%. That's not an explanation of why returns were so puzzlingly high. That's a consequence

Toyota Could Become World's No. 1 Car Maker in 2007 - WSJ.com: By YOSHIO TAKAHASHI and ANDREW MORSE
December 22, 2006 12:12 p.m.
NAGOYA, Japan -- Toyota Motor Corp. said Friday it aims to produce 9.42 million vehicles next year, a level that will likely vault it past struggling U.S. auto giant General Motors Corp. as the world's top car maker.

Toyota's new production targets represent a 4% increase from the 9.04 million vehicles the Nagoya-based company expects to produce in 2006. Indicative of Toyota's increasing reliance on foreign markets: Overseas production will jump 8% to 4.27 million vehicles, while domestic production will rise just 1% to 5.15 million vehicles.

GM, which hasn't released a forecast for next year's production, expects to build 9.18 million vehicles in 2006, up from the 9.11 million vehicles it produced in 2005.

Though widely expected, Toyota's official production plans highlight the diverging fortunes of the world's two truly global car companies. Toyota has ramped up production in North America, Asia and other parts of the world to take advantage of surging demand for its fuel-efficient passenger cars, such as the Camry and the hybrid Prius. It plans to open new plants in China, Thailand and Russia to meet demand for its cars.

Meanwhile, GM is in the midst of a painful restructuring after racking up a $10 billion loss last year. The Detroit-based company has already posted $3 billion in losses this year as sales of big sport-utility vehicles and trucks falter amid persistently high oil prices. The company plans to shutter more factories as part of its restructuring.

Beat the Press: More Bad News on Productivity? Yet another quarter of weak productivity should raise some eyebrows. If we take 1.0 percent as the number for the 4th quarter (which is likely high)... this gives an average annual growth rate of just 1.3 percent over these 5 quarters. That compares to more than 3 percent from 2001-2005. But revisions will make the data look even worse.... [Perhaps] an average annual rate of productivity growth over these 5 quarters of just 1.0 percent, definitely cause for concern.

"Shorts? Listen, my previous fund got hammered on the short side." That is a quote from a fellow sitting at a table squeezed next to me in a major metropolitan Starbucks. The individual in question, who has a few grey hairs like yours truly, is marketing his fund to two younger men who--based on the sophisticated nature of their espresso drinks as well as the unsophisticated nature of their questions--appear to be fund-of-fund investors.

While I don't know the man with the grey hairs, I vaguely recognize him from company meetings in years past as a fellow hedge fund veteran. And what I find interesting about the whole thing is that, based on the quote above as well as snatches of conversation I can't avoid hearing from three feet away, he is quite vociferously playing down his reputation as a hedge fund guy who actually used to hedge his portfolio with shorts.

He is doing so for the purpose of talking up his current, non-hedged hedge fund to his audience, by which I mean the two fund-of-funds managers who, based on their questions thus far, I frankly would not let invest my dog Lucy's biscuit money, let alone the millions or billions of fund-of-fund money they appear to be investing on behalf of institutions seeking a slice of the hedge fund pie. I say this not to disparage fund-of-fund managers as an asset class, but when I hear one of these financial middlemen earnestly explain that "the problem with shorting is that your potential gain is limited to 100% while your potential losses are infinite"--as if that insight just occurred to him, and he had to pass it along before his flash of brilliance got lost in the ether--it does not reflect glory on his peers.

Now, what's the point of all this? you might well ask.

The point is that hedge fund managers appear to be shedding their short-selling identities in order to attract money, precisely at a time when markets are hitting new highs. I find this a fascinating, particularly now that Iraq has turned into a full-fledged civil war, whatever the euphemism of the day, while cost pressures are rising around the world and we've had a currency panic in Thailand, not to mention the forcible appropriation of multi-billion-dollar natural resources from public companies by a thug masquerading as an elected President in Russia, who not for nothing is probably the single most powerful person on earth. And since we know that what goes around, as they say, comes around, it seems to me that maybe now that grown men are eagerly disposing of their past life on the short-selling side of the hedge fund equation, we might be closer to a time when it could actually be worth looking for shorts rather than longs.

After all, if "hedge funds" don't hedge, they're not "hedge funds," are they?

Almost as hard to believe as the conversation overheard by Jeff Matthews is Sebastian Mallaby on hedge funds.

I am reasonably confident that the rise of hedge funds has improved the price-discovery process and helped channel somewhat more capital to fund real investments in things that are truly valuable, I suspect that hedge funds today do not materially add to systemic market risk (although I make no forecasts about the future), I doubt that hedge fund investors are demanding sufficient transparency, and I find it overwhelmingly unlikely that the average hedge fund investor is getting value for the 2%-anfd-20% he or she is paying to hedge fund managers. Sebastian Mallaby, by contrast, says that he knows that hedge funds do not materially add to systemic market risk, that he knows that it would be a mistake to mandate more disclosure than hedge fund investors demand for themselves, and that he knows that hedge fund investors are getting a good deal from the managers who charge 2%-and-20%. How he knows all these things that I do not is unclear: he must have much, much better sources of information than I do, and have spent much more time thinking hard about the issues than I have (NOT!):

Rather than seeing hedge funds as sources of dangerous financial fires, in fact, it is more accurate to see them as the financial system's benevolent fire fighters....

[H]edge funds' unique fee structure... sophisticated investors who pay such fees do so voluntarily... believe that the returns they will receive will more than compensate.... The extraordinary earnings of the top hedge-fund managers reflect the workings of a daunting star system.... Only a few... come up with an insight into how a certain company or currency has been mispriced, see illogical discrepancies between the prices of sets of financial assets, and so forth. And those who do come up with such breakthroughs not only make fortunes for themselves and their clients... they shift market prices until the irrationalities disappear, thus ultimately facilitating the efficient allocation of the world's capital....

[H]edge funds are not precipice dwellers.... [H]edge funds hold a portfolio of positions and can go short as well as long... they can be less volatile.... [H]edge funds collectively do not so much create risk as absorb it....

Hedge funds can also reduce the danger that economies will overrespond to shocks. If a currency or stock market starts to plummet, the best hope for stability lies in self-confident, deep-pocketed investors willing to bet that the fall has gone too far.... [H]edge funds are rewarded for absolute returns, which allows their managers to engage in independent thinking....

[W]hat of the systemic risk that concerns regulators?... The nightmare scenario involves a host of hedge funds making similar bets... [that] turn out to be wrong, a fund could unravel, causing the others to unravel in turn -- and banks that could comfortably swallow the default of one or two funds might find themselves overwhelmed by the default of dozens.... Timothy Geithner... was not, however, saying that the nightmare scenario is likely.... [T]here has to be someone on both sides of each trade... you have to believe that one side of some risky bet is concentrated in a particular corner of the financial system.... The more hedge funds there are, the less likely it is that they will all be concentrated on one side....

Others call for more disclosure, which would allow lenders and regulators to gauge whether funds are crowding dangerously onto one side.... But periodic snapshots of a fund's positions might reveal little... even extensive disclosures can fail to reveal a fund's real risks.... Rather than forcing more disclosure, it would be better to allow the market to promote it...

Brad Setser watches the train wreck that is David Malpass as it tries to mislead the readers of the Wall Street Journal editorial page about the trade deficit:

RGE - Malpass on the US trade deficit...: Tis the season to be compassionate. And I guess that also applies to those who are allowed to grace the Wall Street Journal’s oped page.... One standard critique... brings together people who already agree to reinforce their pre-existing convictions... the Wall Street Journal oped page.... But I was still surprised by the Malpass WSJ oped -- an oped that strongly suggests that the US trade deficit reflects surging business investment in the US, financed by aging, slow growing Europe and Japan. Malpass writes:

the trade deficit and related capital inflow reflect U.S. growth, not weakness -- they link the younger, faster-growing U.S. with aging, slower-growing economies abroad.... The trade deficit is the mechanism allowing consumption and investment in the U.S.to grow faster than in Europe and Japan. The issue for the U.S. is whether it's worth the interest costs. It's the same question facing a small business: Should it borrow money to expand the payroll, train employees, buy land and machines, conduct R&D, build inventory? Profit and credit-worthiness help make the decision...

Malpass is careful not to attribute the rise in the US current account deficit entirely to a surge in business investment. He talks of the increase in "consumption and investment" not of the increase in investment alone. But the analogy between a small business looking for external financing and the US isn't an accident either. Malpass very explicitly argues that the US external deficit doesn't reflect US profligacy....

[T]he US deficit doesn't stem from strong business investment -- and... hasn't been financed by Europe and Japan. Right now, businesses are saving more than they invest.... The US savings shortfall comes from the fact that the US government still spends more than it takes in.... Above all, though, the gap stems from households that don’t save....

And then there is the little matter of who is financing the US. Tis true that a decent chunk of the inflows financing the US must be coming from old, slow growing Japan. But... the rise in the US deficit since 2002 doesn’t primarily reflect a rise in Japan’s current account surplus. Nor does it reflect a rise in Europe's surplus.... The IMF’s data shows (see Table 1.2, p. 12 of Chapter 1 of the WEO) a huge surge in the current account surplus of the emerging world.... And whatever else you want to say about the world’s emerging economies, they aren’t growing slowly....

I don't think there is much doubt -- at least among informed observors -- that fast growing emerging economies are a key source of financing for the US. Nor is there much doubt that a large share of that financing comes... from central banks and oil investment funds....

One of the stereotypes about blogs is that they live in the realm of opinion, a realm divorced from the facts. I am pretty sure that isn’t a vice limited to the blogosphere.

Reporters for the news side of the Wall Street Journal firmly believe that readers make a sharp distinction between WSJ news and editorial pages, and that their good and reality-based work doesn't add credibility to the misinformation on the editorial page. I think that they are deceiving themselves.

As the old Congress wound down in a scramble of post-election activity, incoming House Speaker Nancy Pelosi offered to pay two months'9 severance to staff members working on some committees and in House leadership offices. But her offer was scuttled -- by Republican lawmakers, who complained they didn't have the opportunity to study the proposal and look at costs.

The Senate already provides two months pay for displaced staff members. One of the affected House staffers said his comrades are mystified that a plan that would benefit employees of Republicans would be killed by Republicans: "We hope the Democrats revisit it." --Gary Fields

December 22, 2006

What We Wanted to Tell You About Iran - New York Times: Flynt Leverett and Hillary Mann: HERE is the redacted version of a draft Op-Ed article we wrote for The Times, as blacked out by the Central Intelligence Agency's Publication Review Board after the White House intervened in the normal prepublication review process and demanded substantial deletions. Agency officials told us that they had concluded on their own that the original draft included no classified material, but that they had to bow to the White House. Indeed, the deleted portions of the original draft reveal no classified material. These passages go into aspects of American-Iranian relations during the Bush administration's first term that have been publicly discussed by Secretary of State Condoleezza Rice; former Secretary of State Colin Powell; former Deputy Secretary of State Richard Armitage; a former State Department policy planning director, Richard Haass; and a former special envoy to Afghanistan, James Dobbins...

After looking at RAW STORY, here is my guess as to how the full op-ed originally read:

The Iraq Study Group has added its voice to a burgeoning chorus of commentators, politicians, and former officials calling for a limited, tactical dialogue with Iran regarding Iraq. The Bush administration has indicated a conditional willingness to pursue a similarly compartmented dialogue with Tehran over Iran’s nuclear activities.

Unfortunately, advocates of limited engagement — either for short-term gains on specific issues or to “test” Iran regarding broader rapprochement — do not seem to understand the 20-year history of United States-Iranian cooperation on discrete issues or appreciate the impact of that history on Iran’s strategic outlook. In the current regional context, issue-specific engagement with Iran is bound to fail. The only diplomatic approach that might succeed is a comprehensive one aimed at a “grand bargain” between the United States and the Islamic Republic.

Since the 1980s, cooperation with Iran on specific issues has been tried by successive administrations, but United States policymakers have consistently allowed domestic politics or other foreign policy interests to torpedo such cooperation and any chance for a broader opening. The Reagan administration’s engagement with Iran to secure the release of American hostages in Lebanon came to grief in the Iran-contra scandal. The first Bush administration resumed contacts with Tehran to secure release of the last American hostages in Lebanon, but postponed pursuit of broader rapprochement until after the 1992 presidential election.

In 1994, the Clinton administration acquiesced to the shipment of Iranian arms to Bosnian Muslims, but the leak of this activity in 1996 and criticism from presumptive Republican presidential nominee Robert Dole shut down possibilities for further United States-Iranian cooperation for several years.

These episodes reinforced already considerable suspicion among Iranian leaders about United States intentions toward the Islamic Republic. But, in the wake of the 9/11 attacks, senior Iranian diplomats told us that Tehran believed it had a historic opportunity to improve relations with Washington. Iranian leaders offered to help the United States in responding to the attacks without making that help contingent on changes in America’s Iran policy — a condition stipulated in the late 1990s when Tehran rejected the Clinton administration’s offer of dialogue — calculating that cooperation would ultimately prompt fundamental shifts in United States policy.

The argument that Iran helped America in Afghanistan because it was in Tehran’s interest to get rid of the Taliban is misplaced. Iran could have let America remove the Taliban without getting its own hands dirty, as it remained neutral during the 1991 gulf war. Tehran cooperated with United States efforts in Afghanistan primarily because it wanted a better relationship with Washington.

But Tehran was profoundly disappointed with the United States response. After the 9/11 attacks, Tehran told Washington that they would assist the U.S. in overthrowing the Taliban government in Afghanistan. Well before President Bush took office in January 2001, the United States had joined the United Nations' "6+2" framework for Afghanistan. In the aftermath of the September 11 attacks, the Bush administration used the cover of the "6+2" process to stand up what was effectively a freestanding bilateral channel with Iran, which set the stage for a November 2001 meeting between Secretary of State Colin Powell and the foreign ministers of Afghanistan’s six neighbors and Russia. At this meeting, Afghanistan's neighbors and the United States agreed to creat a broadly-based democratic and anti-terrorist government in Afghanistan. Iran went along, working with the United States to eliminate the Taliban and establish a post-Taliban political order in Afghanistan.

In December 2001, Washington and Afghan President Hamid Karzai urgently asked Tehran to keep Gulbuddin Hekmatyar, the brutal pro-Al Qaeda warlord, from returning to Afghanistan to lead jihadist resistance there. Iran agreed so long as the Bush administration did not criticize it for harboring terrorists. But, in his January 2002 State of the Union address, President Bush did just that in labeling Iran part of the “axis of evil.” Unsurprisingly, Mr. Hekmatyar managed to leave Iran in short order after the speech. The Iranian government explained that it had expelled Hekmatyar and allowed him to return to Afghanistan because the Islamic Republic could not be seen to be harboring terrorists.

In the course of the U.S.-Iranian dialogue over Afghanistan, U.S. officials laid particular stress on what Iran could do to help the Karzai government in Afghanistan by preventing Al Qaeda and the Taliban from using the Afghanistan-Iran border as a sanctuary. In response, Iran deployed additional security forces to its border with Afghanistan. Iran had extensive relationships with key players on the Afghan political scene, including important warlords in northern and western Afghanistan. Iranian influence was critical for arming and managing these players during the U.S.-led coalition's military operations. This demonstrated to Afghan warlords that they could not play America and Iran off one another and prompted Tehran to deport hundreds of suspected Al Qaeda and Taliban operatives who had fled Afghanistan.

Those who argue that Iran did not cause Iraq’s problems and therefore can be of only limited help in dealing with Iraq’s current instability must also acknowledge that Iran did not “cause” Afghanistan’s deterioration into a terrorist-harboring failed state. But, when America and Iran worked together, Afghanistan was much more stable than it is today, Al Qaeda was on the run, the Islamic Republic’s Hezbollah protégé was comparatively restrained, and Tehran was not spinning centrifuges. Still, the Bush administration conveyed no interest in building on these positive trends.

When Tehran sought a quid-pro-quo to strengthen its own security and offered to exchange captured Al-Qaeda leaders for a small group of senior commanders among the Mojahedin-e Khalq (MEK) cadres in Iraq, the administration refused to consider any such exchange, even though the MEK has been designated a foreign terrorist organization by the U.S. Department of State. The United States backtracked on a promise to disarm MEK troops, and canceled scheduled meetings with Iran, accusing it of harboring al-Qaeda leaders implicated in suicide bombings in Saudi Arabia.

From an Iranian perspective, this record shows that Washington will take what it can get from talking to Iran on specific issues but is not prepared for real rapprochement. Yet American proponents of limited engagement anticipate that Tehran will play this fruitless game once more — even after numerous statements by senior administration figures targeting the Islamic Republic for prospective “regime change” and by President Bush himself that attacking Iran’s nuclear and national security infrastructure is “on the table.”

Our experience dealing with European and Iranian diplomats over Afghanistan and in more recent private conversations in Europe and elsewhere convince us that Iran will not go down such a dead-end road again. Iran will not help the United States in Iraq because it wants to avoid chaos there; Tehran is well positioned to defend its interests in Iraq unilaterally as America flounders. Similarly, Iran will not accept strategically meaningful limits on its nuclear capabilities for a package of economic and technological goodies.

Iran will only cooperate with the United States, whether in Iraq or on the nuclear issue, as part of a broader rapprochement addressing its core security concerns. This requires extension of a United States security guarantee — effectively, an American commitment not to use force to change the borders or form of government of the Islamic Republic — bolstered by the prospect of lifting United States unilateral sanctions and normalizing bilateral relations. This is something no United States administration has ever offered, and that the Bush administration has explicitly refused to consider.

Indeed, no administration would be able to provide a security guarantee unless United States concerns about Iran’s nuclear activities, regional role and support for terrorist organizations were definitively addressed. That is why, at this juncture, resolving any of the significant bilateral differences between the United States and Iran inevitably requires resolving all of them. Implementing the reciprocal commitments entailed in a “grand bargain” would almost certainly play out over time and in phases, but all of the commitments would be agreed up front as a package, so that both sides would know what they were getting.

Unfortunately, the window for pursuing a comprehensive settlement with Iran will not be open indefinitely. The Iranian leadership is more radicalized today, with Mahmoud Ahmadinejad as president, than it was three years ago, and could become more radicalized in the future, depending on who ultimately succeeds Ayatollah Ali Khamenei as supreme leader. If President Bush does not move decisively toward strategic engagement with Tehran during his remaining two years in office, his successor will not have the same opportunities that he will have so blithely squandered.

December 21, 2006

Searching, probing. The Power had not bothered to sabotage... but that was no problem.... One more second... safety. The laser flickered on a failure sensor.... Its interrupts could not be ignored.... Interrupt honored. Interrupt handkler running, looking out, receiving more light... a backdoor into the... code... and the Power was aboard, with milliseconds to spare. Its agents--not even human-equivalent on this primitive hardware--raced through the ship's automation.... Cameras in the ship's bridge showed widening of eyes, the beginning of a scream. The humans knew, to the extent that horror can live in a fraction of a second...

The new version of Blogger appears to be reaching out across the Internet and crashing my copy of MarsEdit.

I don't know about you, but I cannot help but smell George F. Will's fear. Here he reveals his total ignorance of Benjamin Franklin, and of other matters:

Franklin did write an autobiography: George Will, who seems to be quite troubled lately with the blogging medium, devoted his column today to comparing us -- that is, literally people like you and me -- to 18th century pamphleteers. Apparently, we don't measure up well.

Richard Stengel, Time's managing editor, says, "Thomas Paine was in effect the first blogger" and "Ben Franklin was essentially loading his persona into the MySpace of the 18th century, 'Poor Richard's Almanack.'" Not exactly. Franklin's extraordinary persona informed what he wrote but was not the subject of what he wrote. Paine was perhaps history's most consequential pamphleteer. There are expected to be 100 million bloggers worldwide by the middle of 2007... none will be like Franklin or Paine. Both were geniuses; genius is scarce.... Most bloggers have the private purpose of expressing themselves for their own satisfaction. There is nothing wrong with that, but there is nothing demanding or especially admirable about it, either.... George III would have preferred dealing with 100 million bloggers rather than one Paine.

There are a great number of things wrong with this analysis, not the least of which is Will apparently having no real familiarity with the political blogs having the kind of impact that bothers him so much. (Honestly, can anyone name an influential political blogger who uses his or her site to share their life and personal experiences? And if not, why is Will troubled by the phenomenon?)

For that matter, why on earth would the number of bloggers have any relevance to the quality of individual writers?... [T]he light of blogging geniuses is no less bright because of their colleagues.

And as for Franklin's persona not having been "the subject of what he wrote," Will is aware that Franklin wrote one of the most celebrated autobiographies in American history, is he not?

No, I honestly don't think Will is aware of the existence of Benjamin Franklin's Autobiography. If he ever read it, he's forgotten all about it.

UPDATE: Most commentators--whether by accident or by design--have missed the significance of this passage in Krugman's op-ed: "Nancy Pelosi, the incoming House speaker, has promised to restore the "pay-as-you-go" rule that the Republicans tossed aside in the Bush years. This rule would basically prevent Congress from passing budgets that increase the deficit. I'm for pay-as-you-go. The question, however, is whether to go further..."

Restoring pay-as-you-go means that the Bush tax cuts expire at the end of this decade--unless, that is, som coalition finds sufficient spending reductions relative to the current baseline spending path to pay for an extension of the tax cuts.

The embrace of pay-as-you-go orders up a $300 billion rise in taxes at the end of this decade. That's a significant amount of deficit reduction all by itself, and a very significant change from Bush administration idiocy.

Paul Krugman says that he thinks that Democratic members of Congress should hold the deficit where it is, and not worry about reducing it: "Fool me once, shame on you; fool me twice..."

Democrats and the Deficit - New York Times: Now that the Democrats have regained some power, they have to decide what to do. One of the biggest questions is whether the party should return to Rubinomics -- the doctrine, associated with former Treasury Secretary Robert Rubin, that placed a very high priority on reducing the budget deficit. The answer, I believe, is no. Mr. Rubin was one of the ablest Treasury secretaries in American history. But it's now clear that while Rubinomics made sense in terms of pure economics, it failed to take account of the ugly realities of contemporary American politics. And the lesson of the last six years is that the Democrats shouldn't spend political capital trying to bring the deficit down. They should refrain from actions that make the deficit worse. But given a choice between cutting the deficit and spending more on good things like health care reform, they should choose the spending.

In a saner political environment, the economic logic behind Rubinomics would have been compelling. Basic fiscal principles tell us that the government should run budget deficits only when it faces unusually high expenses, mainly during wartime. In other periods it should try to run a surplus, paying down its debt.
Since the 1990s were an era of peace, prosperity and favorable demographics (the baby boomers were still in the work force, not collecting Social Security and Medicare), it should have been a good time to put the federal budget in the black. And under Mr. Rubin, the huge deficits of the Reagan-Bush years were transformed into an impressive surplus.

But the realities of American politics ensured that it was all for naught. The second President Bush quickly squandered the surplus on tax cuts that heavily favored the wealthy, then plunged the budget deep into deficit by cutting taxes on dividends and capital gains even as he took the country into a disastrous war. And you can even argue that Mr. Rubin's surplus was a bad thing, because it greased the rails for Mr. Bush's irresponsibility.

As Brad DeLong, a Berkeley economist who served in the Clinton administration, recently wrote on his influential blog: "Rubin and us spearcarriers moved heaven and earth to restore fiscal balance to the American government in order to raise the rate of economic growth. But what we turned out to have done, in the end, was to enable George W. Bush's right-wing class war: his push for greater after-tax income inequality.%" My only quibble with Mr. DeLong's characterization is that this wasn't just one man's class war: the whole conservative movement shared Mr. Bush' squanderlust, his urge to run off with the money so carefully saved under Mr. Rubin's leadership.

With the benefit of hindsight, it's clear that conservatives who claimed to care about deficits when Democrats were in power never meant it. Let's not forget how Alan Greenspan, who posed as the high priest of fiscal rectitude as long as Bill Clinton was in the White House, became an apologist for tax cuts -- even in the face of budget deficits -- once a Republican took up residence.

Now the Democrats are back in control of Congress. They've pledged not to be as irresponsible as their predecessors: Nancy Pelosi, the incoming House speaker, has promised to restore the "pay-as-you-go" rule that the Republicans tossed aside in the Bush years. This rule would basically prevent Congress from passing budgets that increase the deficit. I'm for pay-as-you-go. The question, however, is whether to go further. Suppose the Democrats can free up some money by fixing the Medicare drug program, by ending the Iraq war and/or clamping down on war profiteering, or by rolling back some of the Bush tax cuts. Should they use the reclaimed revenue to reduce the deficit, or spend it on other things?

The answer, I now think, is to spend the money -- while taking great care to ensure that it is spent well, not squandered -- and let the deficit be. By spending money well, Democrats can both improve Americans' lives and, more broadly, offer a demonstration of the benefits of good government. Deficit reduction, on the other hand, might just end up playing into the hands of the next irresponsible president.

In the long run, something will have to be done about the deficit. But given the state of our politics, now is not the time.

In the past, they said: "Under no circumstances will we accept a state, unless it includes all of Palestine, because Palestine is a land of Islamic endowment." Fine. This doesn't work. I can say: "We demand all of the land," and you will applaud me. This doesn't work. This doesn't work. This doesn't work. There is a reality -- either you acknowledge it, or you will get crushed.

Michael Gerson tries to complete the transformation of Republicans into ignorant, amoral swine. Here he is, writing in Newsweek on modern Republicanism:

Gerson: The Republican Identity Crisis - Newsweek Politics - MSNBC.com: Jan. 1, 2007 issue - My low point with the Republican Party came in the aftermath of Hurricane Katrina. In attempting to deliver benefits to victims, the administration found men and women who had never had a bank account; families entirely disconnected from the mainstream economy. A problem rooted in generations of governmentally enforced oppression--slavery and segregation--demanded an active response from government to encourage economic empowerment and social mobility.

Yet the response of many Republicans was to use the disaster as an excuse for cutting government spending, particularly the Medicare prescription-drug benefit for seniors.... [O]ne conservative think-tank sage urged: "The president needs to give up something he wants. Why not the AIDS program for Africa?".... Like all fundamentalists, the antigovernment conservatives preach that greater influence requires a return to purity--the purity of Reaganism. But the golden age of austerity under Reagan is a myth. During the Reagan years, big government got bigger, with federal spending reaching 23.5 percent of GDP.... But the Reagan reality is more admirable than the myth. He wisely chose what was historically necessary--large defense increases and tax reductions--over what was politically unachievable: a massive rollback of government....

As antigovernment conservatives seek to purify the Republican Party, it is reasonable to ask if the purest among them are conservatives at all. The combination of disdain for government, a reflexive preference for markets and an unbalanced emphasis on individual choice is usually called libertarianism. The old conservatives had some concerns about that creed, which Russell Kirk called "an ideology of universal selfishness." Conservatives have generally taught that the health of society is determined by the health of institutions: families, neighborhoods, schools, congregations. Unfettered individualism can loosen those bonds, while government can act to strengthen them.... Anti-government conservatism turns out to be a strange kind of idealism—-an idealism that strangles mercy....

The future of the Republican Party depends on which party it wants to be—-the party of purity, or the party of the governors. In that decision, Republicans should consider: any political movement that elevates abstract antigovernment ideology above human needs is hardly conservative, and unlikely to win...

Look again at what Gerson says: Reagan "wisely chose what was historically necessary--large defense increases and tax reductions." Large defense spending increases and tax reductions don't go together. In the short run they produce a fiscal boost to employment. In the medium run they produce slow growth as government deficits drain the pool of capital available for investment. In the long run they produce hyperinflation, as the failure of the government's resources to match its commitments leads to an effective default. Such an economic policy strategy is not "historically necessary." It reveals a lack of a moral compass, and either total ignorance about the requirements of good government or enormous cynicism--a belief that we can make a mess and somebody else, somebody responsible, will clean it up.

Greg Mankiw thinks that the study of economics makes people more conservative. Perhaps, perhaps not. But if it takes at all, it certainly doesn't turn them into modern Republicans. It tends, rather, to turn them into modern Democrats.

Ben Bernanke says that the low value of the renminbi is an "effective subsidy" to Chinese exporters. He doesn't say that it is also an effective subsidy to U.S. borrowers. Who is paying this subsidy? Ultimately the taxpayers of China. Brad Setser comments:

Brad Setser | Dec 19, 2006:
Bernanke's comment didn't rub me the wrong way (more on that later), but it certainly hit a nerve elsewhere. I suspect the Treasury -- which wants China to appreciate as much as anyone -- wasn't among those who were not thrilled by Bernanke's choice of words. Not because they disagree intellectually. But because Bernanke's comment will be contrasted with the language in Treasury's foreign currency report.

Still, I don't think anyone will be surprised to see that the Treasury declined to find that China meets the technical requirements for being charged with currency manipulation. The language in the law about "intent" gives the Treasury a lot of wiggle room. Paulson telegraphed this pretty much from the day he arrived at the Treasury.

Plus, I doubt the Chinese would have hosted a Strategic Economic Dialogue if they thought they were going to be hit over the head to a "manipulation" charge. "Manipulation" would turn the "dialogue" into a "negotiation" real fast.

Max Baucus is probably right: The semiannual Treasury report ``is no longer a relevant tool to deal with currency issues,'' Senator Max Baucus said in a statement today. The Montana Democrat will be Chairman of the Senate Finance Committee, which oversees U.S. trade policy, when Democrats take control of the Senate in January.

``It's time for a new approach and new tools,'' said Baucus, who promised to work toward legislation that better addresses what he deems unfair currency policies of U.S. trading partners.

But finding new approaches and new tools won't necessarily be easy. Grassley-Baucus seems a bit softer than the likely mood of the new US Congress. Just a guess.

Kevin Drum nominates Stanley Kurtz, for his declaration that it's the media's fault that we didn't believe it. You see, Kurtz says, if the media had lied to us, it would have confirmed our expectations, and we would have believed it. But because it told us the truth that we didn't want to hear, we didn't believe it:

The Washington Monthly: SELF-PARODY WATCH.... Stanley Kurtz is one of the guys on my permanent "ignore" list, but today's contribution to the public discourse is so obliviously unglued that it's worth passing along for its slapstick value alone. Several bloggers linked to this earlier, but I didn't really believe he had said what they said he said (did you follow that?) until I actually read it myself. Here it is:

Conservative distrust of the media's very real bias has inclined us to dismiss reports about problems in Iraq that are real.

In the end, I think the media bears fundamental responsibility for this. Had they been less biased -- had they reported acts of heroism and the many good things we have done in Iraq -- I think conservatives would actually have taken their reporting of the problems in Iraq more seriously. In effect, the media's consistent liberal bias discredits even its valid reports.

....It's a terrible shame that we've come to the point where our ability to believe news reports hinges on a those rare cases where the record shows freedom from liberal bias. The media has discredited themselves, making it tough to take them seriously even when they are right, and that has hurt us all.

So sad. The media's consistent refusal to pay more attention to repainted schoolhouses and instead focus on stuff like insurgent attacks, ethnic rivalries, collapsing infrastructure, ineffective government, and corrupt police forces has fooled us all. How were we to know that they hadn't just made all that stuff up?